Social Networks and Trade Liberalization
University of Winnipeg
University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for International Governance and Innovation (CIGI)
NBER Working Paper No. w10769
We discuss how social considerations can affect the desirability of trade liberalization in a conventional small open economy model. We consider a representative family in which there are location specific network effects from interactions with other family members, such as joint consumption, joint emotional support, and coinsurance. The benefits an individual receives from the network they participate in are nonlinearly related to the number of family members located in urban and rural areas. Family members choose whether to locate in urban or rural areas and average and marginal network benefits differ. With differential network effects in urban and rural areas, in a model with traded urban and rural goods, free trade will no longer be the best policy. We show this through a numerical example, and suggest that the conventional economists case for free trade may need to be more nuanced once social considerations of this type are taken into account.
Number of Pages in PDF File: 16working papers series
Date posted: September 30, 2004
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