Are EU countries less integrated than U.S. states? Theory and evidence

A belief that EU integration is incomplete is often predicated on a comparison to U.S. states. Yet, with low barriers to trade and factor mobility between EU countries, is this belief correct? To address this question, we develop three theoretical predictions regarding the distribution of output and factors across members of an integrated economic area with harmonized policies and free movement of goods and factors. Empirical tests strongly support these predictions for U.S. states and 14 EU countries. Constructing a measure of integration, we find that EU integration rose from the 1960s to equal that of U.S. states by 2000.

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