Trade Theory with Behavioral Agents

Wisarut Suwanprasert

No 216, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: I develop a theoretical framework to study gains from trade and optimal tariffs in the presence of behavioral biases. I introduce a sufficient statistic, called “behavioral wedge,†that generalizes the model to capture various types of behavioral biases, including utility misperceptions and inattention. First, I explore how behavioral biases influence gains from trade, demonstrating potential welfare losses from trade for behavioral agents. Second, I characterize optimal tariffs and behavioral nudges in the presence of behavioral biases. I show that small open economies can leverage trade policy to mitigate the welfare losses from behavioral biases, whereas larger economies might use nudges to manipulate the world’s terms of trade. Finally, I discuss the role of behavioral biases in shaping public support for the 2018 China–United States trade war and Brexit.

Keywords: Trade theory; Behavioral economics; Gains from trade; Optimal tariffs; Nudges (search for similar items in EconPapers)
JEL-codes: D9 F1 H2 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2024-02
New Economics Papers: this item is included in nep-int, nep-mic, nep-nud and nep-upt
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