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. The focus is on the pure scale effects of integration and their welfare implications. The main result of the paper is that integration raises growth and welfare if it generates a market that is more competitive and where firms have access to a larger body of technological spillovers. Specifically, these conditions mean two things: (a) the number of domestic firms does not fall so much that in the integrated market there are fewer firms than in autarky; (b) R&D is characterized by spillovers so that one firms' are observable. The model, thus, provides practical guidelines for predicting the effects of integration by looking at how the larger extent of the market affects the organization of industry. Moreover, these conditions are likely to be met in reality, thus suggesting that economic integration is indeed beneficial.