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Asymmetric information and trade policy

Economists understand protectionism as a costly mechanism to redistribute from the average citizen to special-interest groups; yet political platforms that deviate from free trade have surprising popular appeal. I present an explanation based on heterogeneous information across citizens whose voting decision has an intensive margin. For each politician and each sector, the optimal trade-policy choice caters to the preferences of those voters who are more likely to be informed of that proposal. An overall protectionist bias emerges because in every industry producers are better informed than consumers. This asymmetry emerges in equilibrium because co-workers share industry-specific knwoledge, and because producers have greater incentives to engage in costly learning about their sector. My model implies that more widespread information about trade policy for an industry is associated with lower protection. Cross-sectoral evidence on U.S. non-tariff barriers and newspaper coverage is consistent with this prediction.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1253.

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Date of creation: Nov 2008
Date of revision: Oct 2010
Handle: RePEc:upf:upfgen:1253
Contact details of provider: Web page: http://www.econ.upf.edu/

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