Escaping a protectionist rut: Policy mechanisms for trade reform in a democracy |
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Authors: | Emily Blanchard Gerald Willmann |
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Institution: | aTuck School of Business at Dartmouth, 100 Tuck Hall, Hanover, NH 03755, United States;bDepartment of Economics, Catholic University of Leuven, Naamsestraat 69, 3000 Leuven, Belgium |
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Abstract: | This paper analyzes the dynamics of trade policy reform under democracy. In an overlapping generations model, heterogeneous agents may acquire skills when young thereby determining the skill composition of their cohort. Current and anticipated trade policies influence education decisions and thus voters' trade policy preferences. We show that there may exist two political steady states: one protectionist and one liberal. Transition from the former to the latter can be achieved by government announcements, temporary educational subsidies, or tariff liberalization by trading partners, but generally not by transfer payments to adversely affected workers. We find additionally that reform is politically feasible only if the proposed liberalization is sufficiently large, suggesting that radical reform may be necessary for escaping a protectionist political rut. |
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Keywords: | JEL classification: F13 F16 D72 E60 |
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