Can Compensation Save Free Trade?

University of Nottingham Research Paper No. 2005/14

32 Pages Posted: 2 Aug 2005

See all articles by Carl Davidson

Carl Davidson

Michigan State University - Department of Economics

Steven J. Matusz

Michigan State University - Department of Economics

Douglas Nelson

Tulane University - Department of Economics

Date Written: 2005

Abstract

Trade reform creates winners and losers. When the median voter loses from reform, free trade is blocked. Allowing the electorate to vote for compensatory wage or employment subsidies may lead to free trade under these circumstances. However, placing compensation on the agenda may also lead to an outcome where trade is blocked when it would have been supported otherwise. The reason for the latter result is that the transfer entailed under compensation is larger than the gains that the winners obtain from liberalization. Seeing the inevitable outcome of a series of votes, this group turns against liberalization.

Keywords: Trade, adjustment, compensation, median voter, political economy

JEL Classification: F16, D72

Suggested Citation

Davidson, Carl and Matusz, Steven J. and Nelson, Douglas R., Can Compensation Save Free Trade? (2005). University of Nottingham Research Paper No. 2005/14. Available at SSRN: https://ssrn.com/abstract=764488 or http://dx.doi.org/10.2139/ssrn.764488

Carl Davidson (Contact Author)

Michigan State University - Department of Economics ( email )

25 C Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-7756 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~ec/faculty/davidson/davidson.html

Steven J. Matusz

Michigan State University - Department of Economics ( email )

Department of Economics
486 West Circle Drive
East Lansing, MI 48824
United States
517-353-8719 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://econ.msu.edu/faculty/matusz/index.php

Douglas R. Nelson

Tulane University - Department of Economics ( email )

New Orleans, LA 70118
United States

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