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

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  • Gundlach, Erich
  • de Vaal, Albert

Abstract

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.

Suggested Citation

  • Gundlach, Erich & de Vaal, Albert, 2014. "Look before you leap: Why politicians may have a point to be hesitant about the gains from trade," Economic Systems, Elsevier, vol. 38(1), pages 89-99.
  • 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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    References listed on IDEAS

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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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    More about this item

    Keywords

    Trade policy; Income distribution; Compensation schemes;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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