The Welfare Effects of Economic Integration when Products are Patented

Abstract

This paper presents a model of economic growth where products are invented and patented, and where production involves fixed costs at the location of the plant. The model is used to assess the effects of instantaneous integration of a small, autarkic country into a larger economy on a) consumer welfare and b) the distribution of income. Consumer welfare in the small country rises immediately because of newly available products. Additionally, the welfare of all consumers rises due to economies of scale at the firm level. These latter benefits are gradually replaced by benefits stemming from newly invented products. The distribution of income changes due to a) the asymmetric distribution of patent ownership and b) changes in the ratio’s of skilled to unskilled workers.Economic integration; Income distribution; Product variety