Public Goods in Trade: on the Formation of Markets and Political Jurisdictions

59 Pages Posted: 20 Sep 2010 Last revised: 20 Mar 2022

See all articles by Alessandra Casella

Alessandra Casella

Columbia University - Graduate School of Arts and Sciences, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Jonathan S. Feinstein

Yale School of Management

Date Written: December 1990

Abstract

The current debate in Western Europe centers on the relationship between economic and political integration. To address this problem, we construct a simple general equilibrium model in which the returns to trading are directly affected by the availability of a public good. In our model, heterogeneous agents choose both a club and a market to belong to. In the club, agents vote over the public good, are taxed to finance this good, and receive access to it when they trade. In the market, they are randomly matched with a partner. If a match occurs between traders of different clubs, they both suffer a transactions cost. We show that, in general, the political boundaries established by the clubs can be distinct from market borders, leading to international trade between members of different clubs. Further, as the region develops, markets become wider (eventually leading to a common market) and the desire to avoid transaction costs initially leads to political unification. At still higher levels of development, however, where transaction costs are less important, traders prefer the diversity offered by multiple clubs.

Suggested Citation

Casella, Alessandra and Feinstein, Jonathan S., Public Goods in Trade: on the Formation of Markets and Political Jurisdictions (December 1990). NBER Working Paper No. w3554, Available at SSRN: https://ssrn.com/abstract=1679263

Alessandra Casella (Contact Author)

Columbia University - Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States
212-854-2459 (Phone)
212-854-8059 (Fax)

HOME PAGE: http://www.columbia.edu/~ac186/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan S. Feinstein

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
29
Abstract Views
858
PlumX Metrics