Informationally Efficient Trade Barriers


by Matthew Mitchell and Andrea Moro.
Working paper : PDF
Why are trade barriers often used to protect home producers, even at the cost of introducing deadweight losses from higher commodity prices? We add an informational friction to the standard textbook argument in favor of free trade, and show that trade restrictions may be a moreefficient policy than a lump sum transfer to the displaced producers. Trade barriers, while generating deadweight losses, have the benefit that they do not generate a need for compensation. When the policy maker does not know the amount that should be transferred, the risk of over-compensating may make tradebarrier more efficient.
This is an application of a more general policy paper forthcoming in the AER

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