American Economic Review Vol. 98 No. 4 2008
Trade Policy and Loss Aversion
open access
Abstract
We develop a political economy model where loss aversion and reference dependence are important in shaping people's preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980.
- DOI
- 10.1257/aer.98.4.1675
- Volume
- 98
- Issue
- 4
- Pages
- 1675-1691
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref