AFTER MAASTRICHT - PUBLIC-INVESTMENT, ECONOMIC-INTEGRATION AND INTERNATIONAL CAPITAL MOBILITY

This paper studies some implications of economic integration in the context of a neoclassical model of international trade, public investment and capital mobility. Owing to 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 labour. 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 publc capital of their neighbours.