Government Procurement, International Specialization, and Income Inequality
Recent studies have shown that trade costs may affect the pattern of international specialization. This paper shows that, when government procurement takes a specific pattern, trade costs becomes much less important in determining international specialization. One implications is that market integration and infrastructure building in Europe is very unlikely to reshape the European economic landscape. Welfare analysis shows that a specific scheme of expenditure on procurement may be welfare improving. The same scheme is effective in reducing income inequality across countries and, as such, can be used as substitute of transfer programs.