A draft of the idea in the last post.
Tear it apart :)
Friday, July 13, 2007
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- Karl Smith
- Professor of Economics and Government at the School of Government at the University of North Carolina at Chapel Hill.
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The opinions expressed here are mine and mine alone and should in no way be construed as representing the position or views of the UNC School of Government.
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karl at sog dot unc dot edu
The opinions expressed here are mine and mine alone and should in no way be construed as representing the position or views of the UNC School of Government.
UNC Webpage
15 comments:
Quick though, I would say that the progress of civilization has been the development of institutions that minimize uncertainty of gains and losses among state actors.
The Roman Republic did not fall because any actor wanted to destroy it, but rather because the institutions failed to support the cooperation of the main actors. The uncertainty surrounding the position of Caesar if he were to put down his army and subject himself to prosecution by the senate, and similar uncertainty surrounding Pompei, and the senate itself after Crassus died and old allegiances were dashed.
I would say that prosperity is directly linked to mitigating the uncertainty surround gains and losses, and we should continue society's progress in developing new institutions to do so.
Huh... how about insurance?
Huh... how about insurance?
Good question. In later drafts I am discussing the implications for forms of government provided insurance and why there seems to be no private policy outcome insurance market.
My sense is that it is simply impossible to adjust for moral hazard. How do you know that a job loss is caused by trade policy and certainly you don't want to insure against any job loss.
One of the motivators for this paper was the Hamilton Projects proposal for government wage insurance. It sounded like a good idea to me and I wanted to formalize why that might be.
In the real world, however, policy insurance is lacking and so I think its probably important to consider policy given that fact.
Karl:
1. There is some paper by Fernandez-Rodrik on a related or similar topic. You might be interested in that.
2. Institutions are endogenous. If this was really a big concern, thered already be institutions in place. I agree with others re incomplete markets.
3. It would be interesting to bring in new trade theory to your model. Given gains to variety, these might well offset the welfare losses you describe. Do you not read the work of Paul Krugman?
There is some paper by Fernandez-Rodrik on a related or similar topic. You might be interested in that.
I read that one. Its good and related.
Institutions are endogenous. If this was really a big concern, thered already be institutions in place. I agree with others re incomplete markets.
Point taken but I think its a bit question begging. Shouldn't we try to examine whether or not its a problem and then see if institutions are created to solve it.
It would be interesting to bring in new trade theory to your model.
I think New Trade theory is an interesting and valuable extension. I wanted to keep this model as simple as possible but perhaps it would be worth adding the extension in this draft to give the paper more depth.
Someone has deleted a comment. All comments are welcome and there is a good chance they will be incorporated in the paper since it is so rough right now!
Hi,
I was the one who removed the comment. So, know my questions:
1. What is specific about trade in your analysis? You could have titled your draft simply losses from policy changes.
2. Could it be that by taking time into account the results of your analysis change? What if lambda increases over time when people adjust to the new policies?
3. Could it be that sticking with the status quo is not risk free? If you take actions from other countries into account, you would also get winners and losers in this case.
4. What is the relation between g and d? If g > d => g-d > 0 and your losers are also winners, since than c0 < c0 + g-d.
I agree with the last person's first point, and your conclusions are good (the point about "status quo bias"). You could include changes in trade policy as an example of an application, but I'm not sure it makes sense to use that as the primary motivation for this.
If you're interested in playing prospect theory, loss-aversion is going to create a much stronger effect.
I've been thinking over the past few months, in the context of the observation that economists and the public differ in the extent to which they think about distribution, that another big way in which they may differ is in a preference for stability in and of itself. The American labor force is comparatively flexible, but a laid-off textile worker approaching his fiftieth birthday is going to be less excited about the efficiency gains from new technology that he, too, will share in once he retrains for something different from what he's been doing all his life. (There are some genuine transition costs as well; I'm referring to something else, though. At least I think I am.)
Vega
1) Nothing is trade specific. I am thinking about changing the title after so many suggestion but I like how evocative "losses from trade" is
2)Interesting. That might be a interesting extension. Right now, what I have is a "black swan" argument. That is to say my main point is showing that there exists a situation (black swan) in which these principles we take for granted (that all swans are white) don't hold.
Now most of the time they might in fact hold, but now its an empirical, not a theoretical question.
3) Yes, this is important and I am rewriting to acknowledge this
4) Yes. My point though is that for any d there exists g such that everyone is worse off. We cannot take the fact that someone is better off for granted.
'm not sure it makes sense to use that as the primary motivation for this.
The more people say this the more I consider putting trade on the back burner.
I still think it is nice sense trade is one of the few areas where many economists feel comfortable taking absolutish positions. That is unless X, Y and Z are true I KNOW that trade enhances efficiency.
If you havent already, you might want to take a look at e.g. Matthew Adler's and Chris Sanchirico's stuff on the ex ante vs. ex post views about uncertainty. They deal with the issue of whether a social planner's goal should be to maximise an SWF over individuals' expected utilities (ex ante view), or instead to maximise the expectation of an SWF over realised utilities (ex post view). I only skimmed, but you seem to be assuming the former, while A&S argue for the latter (and I tend to agree with them). If you buy the ex post view, then your result would seem to be not that there may be actual net losses from trade, but rather that individuals could rationally fail to support trade despite it having net benefits.
On the other hand, if you want to get a little more 'out there', you could also think about letting "anticipatory emotions" (and thus uncertainty about the future) affect instantaneous utility directly instead of only affecting expected utility (a la Caplin and Leahy, Koszegi, Koszegi and Rabin). In addition to being a more plausible account of human psychology, this would probably allow for the possibility of net losses even if you adopt an ex post perspective.
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