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Trade Policy, Income Risk and Welfare

  • Tom Krebs
  • Pravin Krishna


    (Department of Economics Brown University)

This paper studies empirically the relationship between trade policy and individual income risk faced by workers, and uses the estimates of this empirical analysis to evaluate the welfare effect of trade reform. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, the paper finds that trade policy changes have a significant short run effect on income risk. Further, whilethe tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 271.

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Date of creation: 2005
Date of revision:
Handle: RePEc:red:sed005:271
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Tom Krebs, 2001. "Idiosyncratic Risk, Aggregate Saving, and Economic Growth," Working Papers 2001-07, Brown University, Department of Economics.
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  14. Tom Krebs, 2000. "Consumption-Based Asset Pricing with Incomplete Markets," Working Papers 2000-10, Brown University, Department of Economics.
  15. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
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  19. repec:tpr:qjecon:v:118:y:2003:i:2:p:709-744 is not listed on IDEAS
  20. Currie, Janet & Harrison, Ann E, 1997. "Sharing the Costs: The Impact of Trade Reform on Capital and Labor in Morocco," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S44-71, July.
  21. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
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  29. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  30. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
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  32. Gordon H. Hanson, 2003. "What Has Happened to Wages in Mexico since NAFTA?," NBER Working Papers 9563, National Bureau of Economic Research, Inc.
  33. Krebs, Tom, 2004. "Testable implications of consumption-based asset pricing models with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 191-206, February.
  34. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
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  38. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
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