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Specialization and Trade: The Perspective of Club and Local Public Good Theories

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  • Pines, David

Abstract

This paper suggests a unified framework for explaining the potential Pareto superiority of a heterogeneous club (jurisdiction) structure over a homogeneous one when there are multiple private goods. The superiority of the heterogeneous structure has been observed by Wilson (1987) in the context of an economy with local public goods and by Gilles and Scotchmer (1996, 1997) in the context of an economy with clubs. In the unified framework suggested in this paper, the two models are combined and reduced to a simple optimization problem. The reduced model shows that the advantage of a heterogeneous structure consists of the gains from trade between differentiated jurisdictions; the disadvantage being the loss from inefficient jurisdiction size. Thus, the club and local public good theories provide a new rationale for specialization and trade among identical individuals. The unified framework is also used in showing that earlier results regarding the possibility of decentralizing the optimal allocation in the case of one private good are equally applicable to the case of multiple private goods.

Suggested Citation

  • Pines, David, 1997. "Specialization and Trade: The Perspective of Club and Local Public Good Theories," Foerder Institute for Economic Research Working Papers 275623, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275623
    DOI: 10.22004/ag.econ.275623
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    References listed on IDEAS

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    1. Joseph E. Stiglitz, 1977. "The Theory of Local Public Goods," International Economic Association Series, in: Martin S. Feldstein & Robert P. Inman (ed.), The Economics of Public Services, chapter 12, pages 274-333, Palgrave Macmillan.
    2. Pines, David, 1991. "Tiebout without politics," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 469-489, November.
    3. Arnott, Richard, 1979. "Optimal city size in a spatial economy," Journal of Urban Economics, Elsevier, vol. 6(1), pages 65-89, January.
    4. Barham, V. & Wooders, M.H., 1994. "First and Second Welfare Theorems for Economies with Collective Goods," Working Papers 9415e, University of Ottawa, Department of Economics.
    5. Berglas, Eitan, 1976. "On the Theory of Clubs," American Economic Review, American Economic Association, vol. 66(2), pages 116-121, May.
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    Financial Economics; Public Economics;

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