A Theory of Economic Disintegration
CESifo, Munich, 2020
CESifo Working Paper No. 8706
We develop a theory of economic disintegration with both endogenously formed tax and trade policies. We show very generally that, contrary to conventional wisdom, a country’s disintegration from an integrated area leads to a deeper integration inside the area. Similarly, the departure of a country from a customs union lowers tariffs world-wide. Moreover, we introduce international firm mobility and non-cooperative business tax policies into the multi-country, multi-sector general equilibrium trade model of Melitz and Ottaviano (2008). We address the model-inherent dimensions of economic disintegration, such as tariffs, non-tariff barriers, the harmonization of production standards and regulations, business frictions, as well as household migration and analyze their effects on the domestic tax policies of asymmetric countries.
Public Finance
Trade Policy