Look Before You Leap: Why Politicians May Have a Point to Be Hesitant About the Gains from Trade

Posted: 17 Oct 2015

See all articles by Erich Gundlach

Erich Gundlach

University of Hamburg

Albert de Vaal

Radboud University Nijmegen - Department of Economics

Abstract

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

Gundlach, Erich and de Vaal, Albert, Look Before You Leap: Why Politicians May Have a Point to Be Hesitant About the Gains from Trade. Economic Systems, Vol. 38, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2674584

Erich Gundlach

University of Hamburg ( email )

Department of Economics
Von-Melle-Park 5
Hamburg, 20146
Germany
+49 40 428384589 (Phone)

HOME PAGE: http://www.erichgundlach.de

Albert De Vaal (Contact Author)

Radboud University Nijmegen - Department of Economics ( email )

Nijmegen, 6500 HK
Netherlands

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