Growth, Market Structure, and the Welfare Effects of Economic Integration

This paper discusses the role of economic integration in a model of endogenous growth where the size of the firm and the interactions between growth and the (endogenous) structure of the market play a crucial role. I focus on the pure scale effects of integration and study explicitly their welfare implications. In a model where the additional trade-offs generated by the interaction between the endogenous structure of the market and the economy's rate of growth play a key role, it is no longer obvious that welfare should increase as a result of economic integration. Both the growth and the welfare effects of integration are, in general, ambiguous. The model, however, gives an intuitive characterization of the conditions necessary for integration to improve growth and welfare. These results support the general insight suggested by Rivera-Batiz and Romer that if integration lets countries exploit increasing returns in R&D (the engine of growth), then it increases the long-run rate of growth purely because it enlarges the extent of the market. The economic mechanism driving this model, however, is quite different from the one driving the standard models of endogenous growth that they consider. This paper, thus, offers a different perspective on the mechanics through which integration lets similar countries exploit increasing returns in R&D and provides new insights and qualifications on the connection between its effects on growth and welfare