Loss Aversion and Trade Policy
This paper provides new survey evidence showing that loss aversion and reference dependence are important in shaping people's perception of trade policy. Under the assumption that agents' welfare functions exhibit these behavioral elemen...
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Online Access: | http://documents.worldbank.org/curated/en/2004/09/5114379/loss-aversion-trade-policy http://hdl.handle.net/10986/14152 |
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okr-10986-141522021-04-23T14:03:21Z Loss Aversion and Trade Policy Freund, Caroline Özden, Çağlar AGENTS AGRICULTURE CAMPAIGN CONTRIBUTIONS CENTRAL BANKS COMPETITIVENESS CONSTANT RETURNS TO SCALE CONSUMER SURPLUS CONSUMERS DEMAND ELASTICITY DEMAND FUNCTIONS ECONOMETRIC MODELS ECONOMICS ELASTICITY EMPIRICAL EVIDENCE EMPIRICAL STUDIES EMPLOYMENT ENDOWMENTS EQUILIBRIUM EXCESS DEMAND FIXED COSTS FREE TRADE IMPORTS INCOME INCOME LEVELS INFLATION INSURANCE INSURANCE MARKETS MARGINAL COST MARGINAL VALUE MARKET STRUCTURE NASH EQUILIBRIUM NET IMPORTS OFFSETTING POLICY INSTRUMENTS POLITICAL ECONOMY PRICE CHANGES PRICE DECLINES PRICE FLUCTUATIONS PRICE INCREASES PRODUCERS PRODUCTION TECHNOLOGY PROSPECT THEORY PROTECTIONISM QUOTAS RISK AVERSE RISK AVERSION RISK LOVING RISK SHARING SALES SPREAD SUPPLY FUNCTIONS TRADE BARRIERS TRADE POLICIES UTILITY FUNCTION UTILITY FUNCTIONS UTILITY THEORY VOTERS WELFARE FUNCTION WORLD MARKETS This paper provides new survey evidence showing that loss aversion and reference dependence are important in shaping people's perception of trade policy. Under the assumption that agents' welfare functions exhibit these behavioral elements, we analyze a model with a welfare-maximizing government and with the lobbying framework of Grossman and Helpman (1994). The policy implications of the augmented models differ in three important ways. One, 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. Two, protection following a single negative price shock will be persistent. Three, irrespective of the extent of lobbying, there will be a deviation from free trade that tends to favor loss-making industries. The augmented models are more consistent with the observed structure of protection, and in particular, explain why many trade policy instruments are explicitly designed to maintain prices at a given level. 2013-06-24T18:18:59Z 2013-06-24T18:18:59Z 2004-09 http://documents.worldbank.org/curated/en/2004/09/5114379/loss-aversion-trade-policy http://hdl.handle.net/10986/14152 English en_US Policy Research Working Paper;No.3385 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, D.C. Publications & Research :: Policy Research Working Paper Publications & Research |
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language |
English en_US |
topic |
AGENTS AGRICULTURE CAMPAIGN CONTRIBUTIONS CENTRAL BANKS COMPETITIVENESS CONSTANT RETURNS TO SCALE CONSUMER SURPLUS CONSUMERS DEMAND ELASTICITY DEMAND FUNCTIONS ECONOMETRIC MODELS ECONOMICS ELASTICITY EMPIRICAL EVIDENCE EMPIRICAL STUDIES EMPLOYMENT ENDOWMENTS EQUILIBRIUM EXCESS DEMAND FIXED COSTS FREE TRADE IMPORTS INCOME INCOME LEVELS INFLATION INSURANCE INSURANCE MARKETS MARGINAL COST MARGINAL VALUE MARKET STRUCTURE NASH EQUILIBRIUM NET IMPORTS OFFSETTING POLICY INSTRUMENTS POLITICAL ECONOMY PRICE CHANGES PRICE DECLINES PRICE FLUCTUATIONS PRICE INCREASES PRODUCERS PRODUCTION TECHNOLOGY PROSPECT THEORY PROTECTIONISM QUOTAS RISK AVERSE RISK AVERSION RISK LOVING RISK SHARING SALES SPREAD SUPPLY FUNCTIONS TRADE BARRIERS TRADE POLICIES UTILITY FUNCTION UTILITY FUNCTIONS UTILITY THEORY VOTERS WELFARE FUNCTION WORLD MARKETS |
spellingShingle |
AGENTS AGRICULTURE CAMPAIGN CONTRIBUTIONS CENTRAL BANKS COMPETITIVENESS CONSTANT RETURNS TO SCALE CONSUMER SURPLUS CONSUMERS DEMAND ELASTICITY DEMAND FUNCTIONS ECONOMETRIC MODELS ECONOMICS ELASTICITY EMPIRICAL EVIDENCE EMPIRICAL STUDIES EMPLOYMENT ENDOWMENTS EQUILIBRIUM EXCESS DEMAND FIXED COSTS FREE TRADE IMPORTS INCOME INCOME LEVELS INFLATION INSURANCE INSURANCE MARKETS MARGINAL COST MARGINAL VALUE MARKET STRUCTURE NASH EQUILIBRIUM NET IMPORTS OFFSETTING POLICY INSTRUMENTS POLITICAL ECONOMY PRICE CHANGES PRICE DECLINES PRICE FLUCTUATIONS PRICE INCREASES PRODUCERS PRODUCTION TECHNOLOGY PROSPECT THEORY PROTECTIONISM QUOTAS RISK AVERSE RISK AVERSION RISK LOVING RISK SHARING SALES SPREAD SUPPLY FUNCTIONS TRADE BARRIERS TRADE POLICIES UTILITY FUNCTION UTILITY FUNCTIONS UTILITY THEORY VOTERS WELFARE FUNCTION WORLD MARKETS Freund, Caroline Özden, Çağlar Loss Aversion and Trade Policy |
relation |
Policy Research Working Paper;No.3385 |
description |
This paper provides new survey evidence
showing that loss aversion and reference dependence are
important in shaping people's perception of trade
policy. Under the assumption that agents' welfare
functions exhibit these behavioral elements, we analyze a
model with a welfare-maximizing government and with the
lobbying framework of Grossman and Helpman (1994). The
policy implications of the augmented models differ in three
important ways. One, 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. Two, protection following a
single negative price shock will be persistent. Three,
irrespective of the extent of lobbying, there will be a
deviation from free trade that tends to favor loss-making
industries. The augmented models are more consistent with
the observed structure of protection, and in particular,
explain why many trade policy instruments are explicitly
designed to maintain prices at a given level. |
format |
Publications & Research :: Policy Research Working Paper |
author |
Freund, Caroline Özden, Çağlar |
author_facet |
Freund, Caroline Özden, Çağlar |
author_sort |
Freund, Caroline |
title |
Loss Aversion and Trade Policy |
title_short |
Loss Aversion and Trade Policy |
title_full |
Loss Aversion and Trade Policy |
title_fullStr |
Loss Aversion and Trade Policy |
title_full_unstemmed |
Loss Aversion and Trade Policy |
title_sort |
loss aversion and trade policy |
publisher |
World Bank, Washington, D.C. |
publishDate |
2013 |
url |
http://documents.worldbank.org/curated/en/2004/09/5114379/loss-aversion-trade-policy http://hdl.handle.net/10986/14152 |
_version_ |
1764430649959120896 |