Economic versus political symmetry and the welfare concern with market integration and tax competition

The paper studies the implications of increased capital market integration and the associated increased tax competition for world welfare. We consider a population with heterogeneous endowments of capital in a model of redistributive politics. We show that if countries have the same average capital endowments but differ with respect to the endowments of their decisive majority, autarky may be socially preferred to integration under any aversion to inequality. We then reverse the conclusion by assuming that the decisive majority has the same endowment but countries differ in their average capital endowments. In proving these results we show that integration may decrease world output and increase the utility of the poorest members of the economy. (C) 2001 Elsevier Science B.V. All rights reserved.