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Heterogeneous information and trade policy

Protectionism enjoys surprising popular support, in spite of deadweight losses. At the same time, trade barriers appear to decline with public information about protection. This paper develops an electoral model with heterogeneously informed voters which explains both facts and predicts the pattern of trade policy across industries. In the model, each agent endogenously acquires more information about his sector of employment. As a result, voters support protectionism, because they learn more about the trade barriers that help them as producers than those that hurt them as consumers. In equilibrium, asymmetric information induces a universal protectionist bias. The structure of protection is Pareto inefficient, in contrast to existing models. The model predicts a Dracula effect: trade policy for a sector is less protectionist when there is more public information about it. Using a measure of newspaper coverage across industries, I find that cross-sector evidence from the United States bears out my theoretical predictions.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1296.

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Date of creation: Nov 2008
Date of revision: Dec 2011
Handle: RePEc:upf:upfgen:1296
Contact details of provider: Web page: http://www.econ.upf.edu/

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