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The unintended consequences of compensating trade’s losers

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  • Seneviratne, Prathi

Abstract

Trade liberalization comes at the expense of some groups, challenging free trade’s viability. This paper examines the transitional and steady-state consequences of compensating trade’s losers. The model economy has overlapping generations and endogenous investment in human and physical capital. Trade liberalization is found to create winners and losers within and across generations. Compensating the losers has unintended consequences. First, it can either diminish or enhance trade-induced capital accumulation. Second, it can make the losers even worse off by distorting capital–labor ratios in the winners’ favor. Third, even a one-time compensation scheme alters capital stocks and welfare along the entire transition. The outcomes depend on factor intensity and skill use across production sectors. The results suggest policymakers face difficult trade-offs when designing compensation to align with their objectives.

Suggested Citation

  • Seneviratne, Prathi, 2025. "The unintended consequences of compensating trade’s losers," Economic Modelling, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:ecmode:v:145:y:2025:i:c:s0264999325000057
    DOI: 10.1016/j.econmod.2025.107010
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    More about this item

    Keywords

    Trade liberalization; Overlapping generations; Human capital; Compensation; Welfare;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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