A Theory of Economic Unions

Authors: Gino Gancia, Giacomo A.M. Ponzetto and Jaume Ventura

Journal of Monetary Economics, Vol. 109, 107-127, January, 2020

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. To understand why, we develop a theoretical model of the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar. However, differences in economic size and factor endowments can trigger disagreement over the value of unions. Our model is consistent with some salient features of the process of European integration and statistical evidence from survey data. © 2019 The Authors

This paper originally appeared as Barcelona GSE Working Paper 1110