On the disentanglement of an economic union [comunicação oral]

Abstract

We study how the unilateral withdrawal of a region from an economic union affects the spatial distribution of economic activity and social welfare. We explore the three-region quasi-linear log utility footloose entrepreneur model under the assumption that this dissent can be expressed as a higher transportation cost between the leaving party and the remaining union members. We find that a spatial distribution in which entrepreneurs are equally shared between the three regions is no longer possible and that asymmetric equilibria – in which the dissident region has the lowest share of entrepreneurs – arise. We also find that it is not stable for entrepreneurs to distribute themselves only between the remaining regions in the union. We conclude that the leaving region’s share of entrepreneurs is higher, the lower the differential in transportation costs is, and the higher the mobility of workers between regions is. Finally, we also conclude that, from a global social welfare point of view, the economy as a whole attains its maximum well-being when most entrepreneurs do not live in the dissident region.