Trade Policy and Loss Aversion
- 1 August 2008
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 98 (4), 1675-1691
- https://doi.org/10.1257/aer.98.4.1675
Abstract
We develop a political economy model where loss aversion and reference dependence are important in shaping people's preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61)Keywords
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