Look Before You Leap: Why Politicians May Have a Point to Be Hesitant About the Gains from Trade
Posted: 17 Oct 2015
Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.
Keywords: Trade policy, Income distribution, Compensation schemes
JEL Classification: F13, H20
Suggested Citation: Suggested Citation