International Integration, Risk and the Welfare State
Torben M. Andersen
University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
Scandinavian Journal of Economics, Vol. 104, pp. 343-364, 2002
How does international integration affect the welfare state? Does it call for a leaner or an expanded welfare state? International integration may affect the distortions caused by welfare state activities but also the risks motivating social insurance mechanisms. This paper addresses these potentially counteracting effects in a fully specified intertemporal two-country stochastic endowment model, focusing on the implications when product market integration reduces trade frictions across national product markets. It is shown that lower trade frictions may increase the marginal costs of public funds, which gives an argument for reducing (steady-state) public consumption. However, tighter integration of product markets unambiguously leads to more variability in private consumption, and this gives a case for expanding the social insurance provided via state-contingent public sector activities (automatic stabilizers).
Number of Pages in PDF File: 22Accepted Paper Series
Date posted: January 4, 2003
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