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Why Join a Common Market? The Political Economy of International Factor Mobility in a Multi-country Setting

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  • Facchini, Giovanni

    (U of Illinois at Urbana-Champaign)

Abstract
This paper develops a theory of the endogenous formation of a common market in a three-country, n factor political economy model. Ex ante policies in each of the prospective members are the result of direct democracy, and equilibrium outcomes may include both import restrictions as well as subsidies. The decision to join a common market is modelled as a simultaneous move game between the two prospective members. Several interesting results emerge. First, ex ante differences in subsidies do not affect the attitude of the median voter. Second, for a common market to emerge, ex post factor flows between prospective members have to be balanced. Third, the likelihood that a common market emerges increases with the number of factors enjoying ex post enhanced protection. This last result highlights the potential tension between social desirability and political feasibility of the common market.

Suggested Citation

  • Facchini, Giovanni, 2002. "Why Join a Common Market? The Political Economy of International Factor Mobility in a Multi-country Setting," Working Papers 02-0121, University of Illinois at Urbana-Champaign, College of Business.
    • Handle: RePEc:ecl:illbus:02-0121
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    File URL: http://www.business.illinois.edu/Working_Papers/papers/02-0121.pdf
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    References listed on IDEAS

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    Cited by:

    1. Federico Etro, 2004. "The Political Economy of Fiscal and Monetary Unions," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 63(3-4), pages 289-328, December.

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