Department of Economics and Business Economics

Product market integration, tax distortions and public sector size

Research output: Contribution to book/anthology/report/proceedingBook chapterResearchpeer-review

The implications of productmarket 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 gainsfrom- 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 inevitably leads to a downward pressure on public sector activities does not get unconditional 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). This type of comparison could not be made in earlier analysis assuming symmetric preferences and technologies across countries.

Original languageEnglish
Title of host publicationGlobalization : Strategies and Effects
Number of pages28
Publication year1 Jan 2017
ISBN (print)9783662495001
ISBN (Electronic)9783662495025
Publication statusPublished - 1 Jan 2017

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