Working Paper: NBER ID: w10769
Authors: Manish Pandey; John Whalley
Abstract: We discuss how social considerations can affect the desirability of trade liberalization in a conventional small open economy model. We consider a representative family in which there are location specific network effects from interactions with other family members, such as joint consumption, joint emotional support, and coinsurance. The benefits an individual receives from the network they participate in are nonlinearly related to the number of family members located in urban and rural areas. Family members choose whether to locate in urban or rural areas and average and marginal network benefits differ. With differential network effects in urban and rural areas, in a model with traded urban and rural goods, free trade will no longer be the best policy. We show this through a numerical example, and suggest that the conventional economists case for free trade may need to be more nuanced once social considerations of this type are taken into account.
Keywords: No keywords provided
JEL Codes: A1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | welfare deterioration (I30) |
| location-specific network effects (D85) | welfare deterioration (I30) |
| removal of tariffs on urban goods (F19) | overall welfare worsening (I30) |
| higher network benefits in rural areas (D85) | unequal wage rates (J31) |
| unequal wage rates (J31) | migration decisions (F22) |