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Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

Listed author(s):
  • Gundlach, Erich
  • de Vaal, Albert

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0939362513000952
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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 38 (2014)
Issue (Month): 1 ()
Pages: 89-99

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Handle: RePEc:eee:ecosys:v:38:y:2014:i:1:p:89-99
DOI: 10.1016/j.ecosys.2013.07.009
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  1. Daron Acemoglu & James A. Robinson, 2013. "Economics versus Politics: Pitfalls of Policy Advice," Journal of Economic Perspectives, American Economic Association, vol. 27(2), pages 173-192, Spring.
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