Loss Aversion and Trade Policy
This paper provides new survey evidence
showing that loss aversion and reference dependence are
important in shaping people's perception of trade
policy. Under the assumption that agents' welfare
functions exhibit these behavioral elements, we analyze a
model with a welfare-maximizing government and with the
lobbying framework of Grossman and Helpman (1994). The
policy implications of the augmented models differ in three
important ways. One, there is a region of compensating
protection, where a decline in the world price leads to an
offsetting increase in protection, such that a constant
domestic price is maintained. Two, protection following a
single negative price shock will be persistent. Three,
irrespective of the extent of lobbying, there will be a
deviation from free trade that tends to favor loss-making
industries. The augmented models are more consistent with
the observed structure of protection, and in particular,
explain why many trade policy instruments are explicitly
designed to maintain prices at a given level.
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Bibliographic Details
| Main Authors: |
Freund, Caroline,
Özden, Çağlar |
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| Language: | English
en_US |
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| Published: |
World Bank, Washington, D.C.
2004-09
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| Subjects: | AGENTS,
AGRICULTURE,
CAMPAIGN CONTRIBUTIONS,
CENTRAL BANKS,
COMPETITIVENESS,
CONSTANT RETURNS TO SCALE,
CONSUMER SURPLUS,
CONSUMERS,
DEMAND ELASTICITY,
DEMAND FUNCTIONS,
ECONOMETRIC MODELS,
ECONOMICS,
ELASTICITY,
EMPIRICAL EVIDENCE,
EMPIRICAL STUDIES,
EMPLOYMENT,
ENDOWMENTS,
EQUILIBRIUM,
EXCESS DEMAND,
FIXED COSTS,
FREE TRADE,
IMPORTS,
INCOME,
INCOME LEVELS,
INFLATION,
INSURANCE,
INSURANCE MARKETS,
MARGINAL COST,
MARGINAL VALUE,
MARKET STRUCTURE,
NASH EQUILIBRIUM,
NET IMPORTS,
OFFSETTING,
POLICY INSTRUMENTS,
POLITICAL ECONOMY,
PRICE CHANGES,
PRICE DECLINES,
PRICE FLUCTUATIONS,
PRICE INCREASES,
PRODUCERS,
PRODUCTION TECHNOLOGY,
PROSPECT THEORY,
PROTECTIONISM,
QUOTAS,
RISK AVERSE,
RISK AVERSION,
RISK LOVING,
RISK SHARING,
SALES,
SPREAD,
SUPPLY FUNCTIONS,
TRADE BARRIERS,
TRADE POLICIES,
UTILITY FUNCTION,
UTILITY FUNCTIONS,
UTILITY THEORY,
VOTERS,
WELFARE FUNCTION,
WORLD MARKETS, |
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| Online Access: | http://documents.worldbank.org/curated/en/2004/09/5114379/loss-aversion-trade-policy
https://hdl.handle.net/10986/14152
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