Dundee Discussion Papers in Economics 116:Cumulative causation, the welfare state and international specialisation

We model a small open economy which produces a high-tech and a low-tech good and whose government pursues redistributive policies financed through distortionary taxation. With vertical linkages between sectors and with unionised labour markets, we analyse the effects of welfare state provision on: (1) the pattern of the country’s trade, (2) the depth of the division of labour within the economy, and (3) the country’s welfare. We show that an increase in the size of the welfare state might have positive effects on the country’s income and on the extent to which the country specialises in the high-tech sector