Skip to content
University of Maryland LibrariesDigital Repository at the University of Maryland
    • Login
    View Item 
    •   DRUM
    • Theses and Dissertations from UMD
    • UMD Theses and Dissertations
    • View Item
    •   DRUM
    • Theses and Dissertations from UMD
    • UMD Theses and Dissertations
    • View Item
    JavaScript is disabled for your browser. Some features of this site may not work without it.

    THE EFFECTS OF LOSS AVERSION ON TRADE POLICY: THEORY AND EVIDENCE

    Thumbnail
    View/Open
    umi-umd-2548.pdf (459.5Kb)
    No. of downloads: 1614

    Date
    2005-05-25
    Author
    Tovar Rodriguez, Patricia
    Advisor
    Limao, Nuno
    Metadata
    Show full item record
    Abstract
    We study the implications of loss aversion for trade policy determination and show how it allows us to explain a number of important and puzzling features of trade policy. An important question concerning trade policy is why a disproportionate share of protection goes to declining industries. We show that if individuals' preferences exhibit loss aversion, higher protection will be given to sectors in which profitability is declining. In addition, by making lobby formation endogenous, we show that an industry will be more likely to become organized and lobby for protection if it has a loss. We also show that if the coefficient of loss aversion is large enough, there will be an anti-trade bias in trade policy. The anti-trade bias refers to the fact that trade policy tends to favor import-competing sectors and thus restricts rather than expands trade, and is considered an important puzzle in the literature. Our lobby formation predictions also reinforce the anti-trade bias result. We use a nonlinear regression procedure to estimate the parameters of the model and test its predictions. We find support for the model and the estimates of the loss aversion parameters are very close to those obtained by Kahneman and Tversky (1992) using experimental data. Protection is found to be more responsive to losses than to gains, and the estimates of the coefficient of loss aversion are about 2. The results are also consistent with diminishing sensitivity to income changes for both gains and losses, a prediction that distinguishes loss aversion from risk aversion. In order to test some predictions on the lobbying side, we estimate an equation on political organization and find evidence of loss aversion in lobby formation. Finally, but importantly, we find that the data favors our model over the current leading political economy model of trade protection, due to Grossman and Helpman (1994).
    URI
    http://hdl.handle.net/1903/2637
    Collections
    • Economics Theses and Dissertations
    • UMD Theses and Dissertations

    DRUM is brought to you by the University of Maryland Libraries
    University of Maryland, College Park, MD 20742-7011 (301)314-1328.
    Please send us your comments.
    Web Accessibility
     

     

    Browse

    All of DRUMCommunities & CollectionsBy Issue DateAuthorsTitlesSubjectsThis CollectionBy Issue DateAuthorsTitlesSubjects

    My Account

    LoginRegister
    Pages
    About DRUMAbout Download Statistics

    DRUM is brought to you by the University of Maryland Libraries
    University of Maryland, College Park, MD 20742-7011 (301)314-1328.
    Please send us your comments.
    Web Accessibility