òòò½Íø Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Trade Policy and Loss Aversion
òòò½Íø Review
vol. 98,
no. 4, September 2008
(pp. 1675–91)
Abstract
We develop a political economy model where loss aversion and reference dependence are important in shaping people’s preferences over trade policy. The policy implications of the augmented model differ in three ways: 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; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61)Citation
Freund, Caroline, and Caglar Ozden. 2008. "Trade Policy and Loss Aversion." òòò½Íø Review 98 (4): 1675–91. DOI: 10.1257/aer.98.4.1675Additional Materials
JEL Classification
- F13 Trade Policy; International Trade Organizations
- F14 Country and Industry Studies of Trade
- L61 Metals and Metal Products; Cement; Glass; Ceramics