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Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

Erich Gundlach () and Albert de Vaal

Economic Systems, 2014, vol. 38, issue 1, 89-99

Abstract: Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.

Keywords: Trade policy; Income distribution; Compensation schemes (search for similar items in EconPapers)
JEL-codes: F13 H20 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.ecosys.2013.07.009

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