The unintended consequences of compensating trade’s losers

Prathi Seneviratne

Economic Modelling, 2025, vol. 145, issue C

Abstract: Trade liberalization comes at the expense of some groups, challenging free trade’s viability. This paper examines the transitional and steady-state consequences of compensating trade’s losers. The model economy has overlapping generations and endogenous investment in human and physical capital. Trade liberalization is found to create winners and losers within and across generations. Compensating the losers has unintended consequences. First, it can either diminish or enhance trade-induced capital accumulation. Second, it can make the losers even worse off by distorting capital–labor ratios in the winners’ favor. Third, even a one-time compensation scheme alters capital stocks and welfare along the entire transition. The outcomes depend on factor intensity and skill use across production sectors. The results suggest policymakers face difficult trade-offs when designing compensation to align with their objectives.

Keywords: Trade liberalization; Overlapping generations; Human capital; Compensation; Welfare (search for similar items in EconPapers)
JEL-codes: E22 E24 F11 F43 O41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:145:y:2025:i:c:s0264999325000057

DOI: 10.1016/j.econmod.2025.107010

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