Sebastian Galiani, Department of Economics, Washington University in St. Louis, Campus Box 1208, One Brookings Drive, St. Louis, MO 63130-4899, USA (firstname.lastname@example.org). Norman Schofield, Department of Political Science, Washington University in St. Louis, Campus Box 1207, One Brookings Drive, St. Louis, MO 63130-4899, USA (email@example.com). Gustavo Torrens, Department of Economics, Washington University in St. Louis, Campus Box 1208, One Brookings Drive, St. Louis, MO 63130-4899, USA (firstname.lastname@example.org).
Factor Endowments, Democracy, and Trade Policy Divergence
Article first published online: 15 AUG 2013
© 2013 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 16, Issue 1, pages 119–156, February 2014
How to Cite
GALIANI, S., SCHOFIELD, N. and TORRENS, G. (2014), Factor Endowments, Democracy, and Trade Policy Divergence. Journal of Public Economic Theory, 16: 119–156. doi: 10.1111/jpet.12057
We appreciate very helpful comments from two anonymous referees, Daniel Heymann, David Levine, Paulo Somaini, Donald Saari, and participants at World Congress of the Econometric Society 2010, the International Conference on Political Economy and Institutions 2010, APET Meeting 2010, Annual Meeting of DEGIT 2010, and Annual Meeting of LACEA 2010, the Meeting of SAET, 2011, and seminar participants at World Bank, Washington University in St. Louis, and Universidad de San Andrés. Norman Schofield acknowledges financial support from NSF grant 0715929 and Sebastian Galiani acknowledges financial support from ESRC grant 062-23-1360.
- Issue published online: 7 JAN 2014
- Article first published online: 15 AUG 2013
- Accepted manuscript online: 17 JUN 2013 02:57AM EST
- Manuscript Accepted: 18 JAN 2012
- Manuscript Received: 17 NOV 2010
- NSF. Grant Number: 0715929
- ESRC. Grant Number: 062-23-1360
We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector-specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic groups in society (landlords, industrialists, labor, and skilled workers). We then use those ideal policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land)–abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource–abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.