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Trade policy, income risk, and welfare

  • Krebs, tom
  • Krishna, Pravin
  • Maloney, William

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 The World Bank in its series Policy Research Working Paper Series with number 3622.

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Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:wbk:wbrwps:3622
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  28. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
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  32. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  33. Tom Krebs, 2000. "Consumption-Based Asset Pricing with Incomplete Markets," Working Papers 2000-10, Brown University, Department of Economics.
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  37. 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.
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