Affiliation:
1. World Bank, DECRG, World Bank Mailstop MC3-301, 1818 H Street NW, Washington, DC 20433.
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)
Publisher
American Economic Association
Subject
Economics and Econometrics
Cited by
69 articles.
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