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Optimism, Pessimism, and the Gains from Trade

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  • Blanchard, Michel
  • Blanchard, Frederic

Abstract

This paper examines the debate over the gains from trade when international differences in the risk perception of heterogeneous managers provide the basis for trade: the relatively optimistic country exports the risky commodity whereas the relatively pessimistic country exports the certain commodity. We show that optimal trade policy depends on the choice of the welfare criterion, as ex-ante and ex-post criteria often lead to opposing conclusions. The more optimistic country is always better off ex-ante whereas it can end up worse off ex-post. The more pessimistic country may be worse off/better off ex-ante but better off/worse off according to the ex-post welfare criterion.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6342.

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Date of creation: 18 Dec 2007
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Handle: RePEc:pra:mprapa:6342

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Keywords: Idiosyncratic Risk; Optimism; Pessimism; Heterogeneity; Trade Losses; ex-ante and ex-post welfare;

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References

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  15. Charles Blackorby & David Donaldson & Philippe Mongin, 2004. "Social Aggregation Without the Expected Utility Hypothesis," Working Papers hal-00242932, HAL.
  16. Hammond, Peter J, 1981. "Ex-ante and Ex-post Welfare Optimality under Uncertainty," Economica, London School of Economics and Political Science, vol. 48(191), pages 235-50, August.
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  19. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  20. Blanchard, Michel & Peltrault, Frédéric, 2004. "The welfare effects of international trade with optimistic and pessimistic managers," Economics Papers from University Paris Dauphine 123456789/92, Paris Dauphine University.
  21. Frederic Peltrault & Michel Blanchard, 2004. "The welfare effects of international trade with optimistic and pessimistic managers," Economics Bulletin, AccessEcon, vol. 6(15), pages 1-10.
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