After Maastricht: Public Investment, Economic Integration, and International Capital Mobility

Abstract

This paper studies some interesting implications of economic integration in the context of a neoclassical model of international trade, optimal public investment, and capital mobility. Due the endogeneity of the productive public capital stock, international capital mobility, while equalizing returns to capital, can lead to a divergence in the wages earned by labor. We also demonstrate that international capital mobility can set off an "infrastructure" investment boom. If the benefits of public capital spill over across national borders, governments in the Nash equilibrium spend the "1992" dividend on an excessive provision of public services, attempting to free ride on the public capital of their neighbors