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  3. American Economic Review
  4. September 2008
  5. Trade Policy and Loss Aversion

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Trade Policy and Loss Aversion

  • Caroline Freund
  • Caglar Ozden
American Economic Review
vol. 98, no. 4, September 2008
(pp. 1675–91)
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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)

Citation

Freund, Caroline, and Caglar Ozden. 2008. "Trade Policy and Loss Aversion." American Economic Review, 98 (4): 1675–91. DOI: 10.1257/aer.98.4.1675

Additional Materials

JEL Classification

  • F13 Trade Policy; International Trade Organizations
  • F14 Country and Industry Studies of Trade
  • L61 Metals and Metal Products; Cement; Glass; Ceramics