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Trade Policy and Loss Aversion

Author

Listed:
  • Caroline Freund
  • Caglar Ozden

Abstract

We develop a political economy model where loss aversion and reference dependence are important in shaping people’s preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61)

Suggested Citation

  • Caroline Freund & Caglar Ozden, 2008. "Trade Policy and Loss Aversion," American Economic Review, American Economic Association, vol. 98(4), pages 1675-1691, September.
  • Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1675-91
    Note: DOI: 10.1257/aer.98.4.1675
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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics

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