Why join a common market? The political economy of international factor mobility in a multi−country setting

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. I would like to thank Todd Elder, Hadi Esfahani, Horst Ra®, Gerald Willmann and Nicholas Yannelis for very useful comments, as well as seminar audiences at Kiel, Tilburg and Paris. Published: 2002 URL: http://www.business.uiuc.edu/Working_Papers/papers/02−0121.pdf Why join a common market? The political economy of international factor mobility in a multi-country setting Giovanni Facchini∗ Department of Economics University of Illinois at Urbana-Champaign August 27, 2002 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. JEL classification: F1, F2, P16This 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. JEL classification: F1, F2, P16 ∗I would like to thank Todd Elder, Hadi Esfahani, Horst Raff, Gerald Willmann and Nicholas Yannelis for very useful comments, as well as seminar audiences at Kiel, Tilburg and Paris.