The Effects of Loss Aversion on Trade Policy and the Anti-Trade Bias Puzzle

Patricia Tovar

No 499, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: We study the implications of loss aversion for trade policy determination and show how it allows us to explain a number of important and puzzling features of trade policy. In particular, we show that if individual preferences exhibit loss aversion and the coefficient of loss aversion is large enough, there will be an anti-trade bias in trade policy. We also show that, for a sufficiently high coefficient of loss aversion, more import-competing lobbies will form than under the current leading political economy model of trade protection due to Grossman and Helpman (1994), and import-competing sectors will be more likely to form a lobby than export sectors, reinforcing the anti-trade bias result. The predictions for protection that we obtain also imply that, everything else equal, higher protection will be given to those sectors in which profitability is declining. We use a nonlinear regression procedure to directly estimate the parameters of the model and test the empirical validity of its predictions. We find empirical support for the model and, very importantly, we obtain estimates of the parameters that are very close to those estimated by Kahneman and Tversky (1992) using experimental data. In order to test some predictions on the lobbying side, we estimate a Probit equation on political organization using the two-stage conditional maximum likelihood estimator proposed by Rivers and Vuong (1988), and find evidence of loss aversion in lobby formation. Finally but importantly, we find that the data favors our model over the Grossman and Helpman model

Keywords: Trade policy; anti-trade bias; loss aversion (search for similar items in EconPapers)
JEL-codes: F13 (search for similar items in EconPapers)
Date: 2004-08-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://repec.org/esNASM04/up.17099.1075568361.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:499

Access Statistics for this paper

More papers in Econometric Society 2004 North American Summer Meetings from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum (baum@bc.edu).