Public Goods in Trade: On the Formation of Markets and Political Jurisdictions / Alessandra Casella, Jonathan S. Feinstein.

Format:

Book

Author/Creator:

Casella, Alessandra.

Contributor:

National Bureau of Economic Research.

Feinstein, Jonathan S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3554.

NBER working paper series no. w3554

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Public Goods in Trade

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1990.

Summary:

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.

Notes:

Print version record

December 1990.