Working Paper: CEPR ID: DP13367
Authors: Gene Grossman; Elhanan Helpman
Abstract: We characterize trade policies that result from political competition when assessments of well-being include both material and psychosocial components. The material component reflects, as usual, satisfaction from consumption. Borrowing from social identity theory, we take the psychosocial component as combining the pride and self-esteem an individual draws from the status of groups with which she identifies and a dissonance cost she bears from identifying with those that are different from herself. In this framework, changes in social identification patterns that may result, for example, from increased income inequality or heightened racial and ethnic tensions, lead to pronounced changes in trade policy. We analyze the nature of these policy changes.
Keywords: social identity; political economy; tariff formation; protectionism; populism
JEL Codes: F13; D78
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in social identification patterns (Z13) | trade policy (F13) |
| increased income inequality (D31) | changes in social identification patterns (Z13) |
| heightened racial and ethnic tensions (J15) | changes in social identification patterns (Z13) |
| less-skilled workers cease to identify with broad national group (F66) | jump in equilibrium tariff rate (F18) |
| rise in populism (D72) | changes in identification regime (F55) |
| changes in identification regime (F55) | trade policy (F13) |
| material welfare and psychosocial components of utility (I31) | trade policy preferences (F13) |
| narrow identification with own class (F55) | rise in equilibrium tariff (F14) |