Heterogeneous Information and Trade Policy

Giacomo Ponzetto

No 189, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Protectionism is a costly mechanism to redistribute from the average citizen to special-interest groups, yet protectionist political platforms have a surprising popular appeal. At the same time, I present evidence of a Dracula effect: protection declines when public information is greater. I explain both facts through an electoral model with heterogeneously informed voters. In a setting of probabilistic voting, I show that the equilibrium tariff for each sector caters to the preferences of agents more likely to be informed of policy proposals for the sector itself. I highlight two sources of endogenous information asymmetry. First, I assume that coworkers share industry-specific knowledge. Second, I allow costly information acquisition and assume that producers must invest in production capacity before the election. Through both channels I find that in every industry producers are more informed than consumers, inducing an overall protectionist bias. Costly learning also explains why politicians offer redistribution through distortive tariffs: transfers to producers are noticed by their beneficiaries only if they distort prices and investments. An empirical analysis of non-tariff barriers and newspaper coverage across U.S. industries supports the predictions of the model.

Date: 2011
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