Financial and Product Market Integration under Increasing Returns to Scale

The impact of financial integration and product market integration is studied in a general equilibrium model with increasing returns in both the manufacturing sector and the financial sector. Firms engage in oligopolistic competition. An increase of the degree of competition in the financial sector resulting from financial integration may not change the degree of competition in the product market. With product market integration, the level of technology, the wage rate, and the interest rate paid to depositors increase. Joint integration increases the level of technology, the wage rate, and the interest rate paid to depositors. The impact of separate financial integration or separate product market integration will not be reversed under joint integration. Social welfare increases under all integration regimes.