Wedges: Distribution, Distortions, and Market Integration

Abstract

This paper proposes a stylized model of policy determination and imperfect international integration. A country-specific policy wedge corrects labor market imperfections and/or redistributes welfare across differently wealthy agents. Capital market integration with the rest of the world, indexed by another wedge, shapes the politico-economic equilibrium policy through race-to-the-bottom and beggar-thy-neighbor channels. The policy and welfare implications of tighter international integration depend in sharp and empirically realistic ways on country-specific political and structural features.

Keywords: policy competition, capital mobility

JEL Classification: F020, D330, J080