Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/21501
Authors: 
Andersen, Torben M.
Year of Publication: 
2002
Series/Report no.: 
IZA Discussion paper series 456
Abstract: 
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 twocountry stochastic endowment model focusing on the implications of product market integration reducing 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).
Subjects: 
Trade frictions
risk-sharing
optimal public consumption
social insurance
JEL: 
H11
F10
E30
Document Type: 
Working Paper

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