Can everyone benefit from economic integration?

• Author: Takashi Hayashi,Christopher P. Chambers
• DOI: http://doi.org/10.1111/jpet.12420
• Date: 01 June 2020
• Published date: 01 June 2020

J Public Econ Theory. 2020;22:821–833. wileyonlinelibrary.com/journal/jpet © 2019 Wiley Periodicals, Inc.

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821

Received: 21 March 2019

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Accepted: 1 December 2019

DOI: 10.1111/jpet.12420

ORIGINAL ARTICLE

Can everyone benefit from economic

integration?

Christopher P. Chambers

1

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Takashi Hayashi

2

1

Department of Economics,

Georgetown University, Washington,

District of Columbia

2

Adam Smith Business School, University

of Glasgow, Glasgow, UK

Correspondence

Takashi Hayashi, Adam Smith Business

School, University of Glasgow, Glasgow

G12 8QQ, UK.

Email: Takashi.Hayashi@glasgow.ac.uk

Abstract

There is no Pareto efficient allocation rule which always

encourages economic integration. Further, for any

efficient rule treating indistinguishable agents identi-

cally in welfare terms, there is an economy in which a

third of the agents are hurt upon integration.

1

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INTRODUCTION

The market mechanism furnishes gains from trade: All individuals participating in a market

can do no worse than they would absent trade. This is because a market permits individuals to

abstain from trade. Technically, we say that a market mechanism is individually rational.

On the other hand, in a market mechanism, there are in general both winners and losers

when separate groups combine into a global market. This can lead to a complicated political

dynamic in which various groups compete and negotiate trade treaties.

In this note, we ask whether the presence of winners and losers in trade liberalization is

specific to the market mechanism, or whether it persists more broadly.

While globalization affords more opportunities to trade, and more room for comparative

advantage in production, unambiguous Pareto improvements are unlikely without some form

of redistribution.

Clearly, were there a mechanism whereby economic integration unambiguously benefitted

everybody, the politicization of trade‐related issues would be mitigated, if not eliminated. The

purpose of this note is to investigate whether such a mechanism exists. We do so in a model of

pure exchange, absent production. This is not because production is not important—it is—but

because even in the benchmark case of exchange, we derive an impossibility. There is no Pareto

efficient mechanism which encourages economic integration.

This note proceeds as follows. Section 2 presents a simple market where the introduction of a

new member unambiguously hurts an agent under market equilibrium. Section 3 presents the

model and a few basic propositions. Section 4 establishes the main result. Section 5 establishes a

broader result; namely, that any Efficient rule satisfying a basic fairness requirement must