Trade Policy and Loss Aversion
American Economic Review · 2008 · Volume 98 · Issue 4
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. (JEL F13, F14, L61)
Keywords
Trade Policy, International Trade Organizations, Country and Industry Studies of Trade, Metals and Metal Products, Cement, Glass, Ceramics
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