Asymmetric information and trade policy

Giacomo Ponzetto

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Economists understand protectionism as a costly mechanism to redistribute from the average citizen to special-interest groups; yet political platforms that deviate from free trade have surprising popular appeal. I present an explanation based on heterogeneous information across citizens whose voting decision has an intensive margin. For each politician and each sector, the optimal trade-policy choice caters to the preferences of those voters who are more likely to be informed of that proposal. An overall protectionist bias emerges because in every industry producers are better informed than consumers. This asymmetry emerges in equilibrium because co-workers share industry-specific knwoledge, and because producers have greater incentives to engage in costly learning about their sector. My model implies that more widespread information about trade policy for an industry is associated with lower protection. Cross-sectoral evidence on U.S. non-tariff barriers and newspaper coverage is consistent with this prediction.

Date: 2008-11, Revised 2010-10
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Working Paper: Asymmetric Information and Trade Policy (2010)
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