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On The Advantages of Piecemeal Integration

Author

Listed:
  • Hansen, Bodil O.

    (Department of Economics, Copenhagen Business School)

  • Keiding, Hans

    (Department of Economics, Copenhagen Business School)

Abstract

For the study of economic integration, it is costumary to use a three countryworld, where two of the countries may introduce forms of closer economic cooperation. In the present model, we follow this tradition but put special emphasis on the role of credit and entrepreneurship. Our model is of the standard neoclassical type, with the addition that production takes time and is subject to uncertainty. Also, firms must use the financial system in order to buy inputs; the cost of credit may differ among countries and industries, reflecting their basic patterns of uncertainty. Following the Newbery-Stiglitz approach, we show that in such model we may exhibit cases of Pareto inferior trade and, in particular, Pareto inferior economic integration. More specifically, we show that integrating countries of very different economic size may give rise to adverse effects on welfare, whereas integration of countries with a more similar economic structure and size tends to have beneficial effects for the parties.

Suggested Citation

  • Hansen, Bodil O. & Keiding, Hans, 2005. "On The Advantages of Piecemeal Integration," Working Papers 04-2005, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2005_004
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    References listed on IDEAS

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    1. Gale, D. & Mas-Colell, A., 1975. "An equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 2(1), pages 9-15, March.
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    4. David M. G. Newbery & Joseph E. Stiglitz, 1984. "Pareto Inferior Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(1), pages 1-12.
    5. Hamid Beladi & Nancy H. Chau, 2000. "Endogenous factor market distortion, risk aversion, and international trade under input uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 523-539, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    trade; uncertainty; Pareto inferior trade; regional integration;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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