DP11980 Wedges: Distribution, Distortions, and Market Integration

Author(s): Giuseppe Bertola
Publication Date: April 2017
Keyword(s): Capital mobility., Policy competition
JEL(s): D33, F02, J08
Programme Areas: Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11980

This paper proposes a stylized model of policy determination and imperfect international integration. A policy wedge aims to correct laissez-faire market imperfections and/or redistribute welfare across heterogeneous agents. Policy is subject to both race-to-the-bottom and beggar-thy-neighbor forces if the country's politico-economic equilibrium interacts with the rest of the world. Variation of international market wedges induces patterns of country-specific regulation and deregulation that depend on political and structural features in non-obvious, intuitive, and empirically realistic ways.