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
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:38:y:2014:i:1:p:89-99
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