Department of Economics and Business Economics

Product market integration, tax distortions and public sector size

Research output: Working paperResearch

Documents

  • wp13_28

    Submitted manuscript, 790 KB, PDF document

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).
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages18
Publication statusPublished - 18 Dec 2013
SeriesEconomics Working Papers
Number2013-28

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 67388026