Look before you leap: Why politicians may have a point to be hesitant about the gains from trade
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SourceEconomic Systems, 38, 1, (2014), pp. 89-99
Article / Letter to editor
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SubjectDistributional Conflicts in a Globalizing World: Consequences for State-Market-Civil Society Arrangements
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.
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