On the political economy of economic integration.

We consider a general equilibrium model with vertical preferences for one good and two identical countries each with one firm initially. Citizens in each country vote either for economic integration (or openness) or for autarky. A decision for free trade is effective only when bilateral. Each citizen in each country is potentially a consumer, a worker and a shareholder in the domestic firm. Citizens differ with respect to their preference for quality and labor ability. Free trade always lowers (increases) social welfare in the low (high)-quality country, with a positive overall effect. The vote outcome however depends on the majority vote in the low-quality country, as the high-quality country always votes for openness. The outcome thus depends in a complex way on the degree of concentration of the ownership structure in the low quality country and the relative dispersion of the citizens with respect to their preference for quality and labor ability. The decentralized decision through voting yields a complex outcome, suggesting an explanation for the observed diversity of views on the merits of free trade. [ABSTRACT FROM AUTHOR]