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Optimism, Pessimism, and the Gains from Trade

Author

Listed:
  • Blanchard, Michel
  • Blanchard, Frederic

Abstract

This paper examines the debate over the gains from trade when international differences in the risk perception of heterogeneous managers provide the basis for trade: the relatively optimistic country exports the risky commodity whereas the relatively pessimistic country exports the certain commodity. We show that optimal trade policy depends on the choice of the welfare criterion, as ex-ante and ex-post criteria often lead to opposing conclusions. The more optimistic country is always better off ex-ante whereas it can end up worse off ex-post. The more pessimistic country may be worse off/better off ex-ante but better off/worse off according to the ex-post welfare criterion.

Suggested Citation

  • Blanchard, Michel & Blanchard, Frederic, 2007. "Optimism, Pessimism, and the Gains from Trade," MPRA Paper 6342, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:6342
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    File URL: https://mpra.ub.uni-muenchen.de/6342/1/MPRA_paper_6342.pdf
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    References listed on IDEAS

    as
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    3. Doherty, Neil A & Eeckhoudt, Louis, 1995. "Optimal Insurance without Expected Utility: The Dual Theory and the Linearity of Insurance Contracts," Journal of Risk and Uncertainty, Springer, vol. 10(2), pages 157-179, March.
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    5. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 31-66.
    6. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    7. Brainard, William C. & Cooper, Richard N., 1968. "Uncertainty and Diversification in International Trade," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 8(3), pages 1-29.
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    More about this item

    Keywords

    Idiosyncratic Risk; Optimism; Pessimism; Heterogeneity; Trade Losses; ex-ante and ex-post welfare;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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