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Equity and Trade Policy

  • Joseph Francois

    ()

    (Johannes Kepler University (Linz))

  • Hugo Rojas-Romagosa

    ()

    (CPB (the Hague))

We develop a dual approach to analyzing general equilibrium relationships between trade policy and household (as distinct from functional) income distribution, highlighting how general equilibrium distributional aspects of social welfare related to import protection may be examined alongside corresponding efficiency aspects in a dual framework. This includes the introduction of a social welfare function into the dual GE system that is explicitly separable between mean income and income dispersion. This then follows through to the government ob jective function. For government, this is manifested not only in special interest politics, but also through the direct impact of inequality on a governmentÕs ob jective function. We find that equity considerations may serve to counter lobbying interests in both capital-rich and capital-poor countries, though with an opposite marginal impact on the final policy outcome. We also identify a protectionist bias on the part of welfare maximizing governments in capital-rich countries. Our dual framework also offers a possible empirical framework for decomposition of policy-induced price changes into household inequality for a broad class of models.

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Paper provided by Institue for International and Development Economics in its series IIDE Discussion Papers with number 20070501.

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Length: 36 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:lnz:wpaper:20070501
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  1. Sen, Amartya, 1974. "Informational bases of alternative welfare approaches : Aggregation and income distribution," Journal of Public Economics, Elsevier, vol. 3(4), pages 387-403, November.
  2. Bourguignon, F. & Morrisson, C., 1989. "Income Distribution, Development and Foreign Trade: A Cross-Sectional Analysis," DELTA Working Papers 89-05, DELTA (Ecole normale supérieure).
  3. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  4. Antonio Spilimbergo & Juan Luis Londoño & Miguel Székely, 1997. "Income Distribution, Factor Endowments, and Trade Openness," Research Department Publications 4088, Inter-American Development Bank, Research Department.
  5. Ronald W. Jones, 1965. "The Structure of Simple General Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 73, pages 557.
  6. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434.
  7. Helpman, E., 1995. "Politics and Trade Policy," Papers 30-95, Tel Aviv - the Sackler Institute of Economic Studies.
  8. Matthew Higgins & Jeffrey G. Williamson, 1999. "Explaining inequality the world round: cohort size, Kuznets curves, and openness," Staff Reports 79, Federal Reserve Bank of New York.
  9. Galor, Oded, 1994. "Tariffs, Income Distribution and Welfare in a Small Overlapping-Generations Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 173-92, February.
  10. J. Francois & H. Rojas-Romagosa, 2004. "Trade Policy and the Household Distribution of Income," Tinbergen Institute Discussion Papers 04-051/2, Tinbergen Institute, revised 15 Jun 2004.
  11. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975, March.
  12. Francois, Joseph & Rojas-Romagosa, Hugo, 2005. "Equity, welfare, and the setting of trade policy in general equilibrium," Policy Research Working Paper Series 3731, The World Bank.
  13. Dutt, Pushan & Mitra, Devashish, 2002. "Endogenous trade policy through majority voting: an empirical investigation," Journal of International Economics, Elsevier, vol. 58(1), pages 107-133, October.
  14. J. David Richardson, 1995. "Income Inequality and Trade: How to Think, What to Conclude," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 33-55, Summer.
  15. Francois, Joseph & Rojas-Romagosa, Hugo, 2004. "Household Inequality, Welfare and the Setting of Trade Policy," CEPR Discussion Papers 4624, C.E.P.R. Discussion Papers.
  16. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
  17. Baldwin, Robert E, 1989. "The Political Economy of Trade Policy," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 119-35, Fall.
  18. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
  19. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
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