Torben M. Andersen

Product market integration, tax distortions and public sector size

Publikation: Working paperForskning


  • wp13_28

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The implications of product market integration for public sector activities (transfers and public consumption) are considered in a standard setting. The analysis supports that a larger public sector (higher tax rate) tends to increase wages and worsen wage competitiveness. However, the implications of product market integration for the public sector are far from straightforward. The reason is gains-from-trade effects which tend to increase the tax base and decrease the opportunity costs of public consumption (marginal utility of private consumption falls). It follows that the retrenchment view that product market integration inevitable leads to a downward pressure on public sector activities does not get support in a standard setting. A particularly noteworthy finding is that a country with a large public sector (strong preferences for public consumption) may benefit more by integrating with a country with a smaller public sector (weak preferences for public consumption).
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider18
StatusUdgivet - 18 dec. 2013
SerietitelEconomics Working Papers


  • labour taxation, product market integration, public sector, policy spill-over

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