NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Insulation as Social Protection

Quy-Toan Do, Andrei A. Levchenko, Martin Ravallion

Chapter in NBER book The Economics of Food Price Volatility (2014), Jean-Paul Chavas, David Hummels, and Brian D. Wright (p. 345 - 366)
Conference held August 15-16, 2012
Published in October 2014 by University of Chicago Press
© 2014 by the National Bureau of Economic Research

In a world with volatile food prices, countries have an incentive to shelter their populations from the induced real income shocks. When some agents are net food producers while others are net consumers, there is scope for insurance between the two groups. A domestic social protection scheme could transfer resources away from the former group to the latter in times of high food prices, and do the reverse otherwise. We show that in the presence of consumer preference heterogeneity, implementing the optimal social protection policy can potentially induce higher food price volatility. Such a policy indeed generates a counter-cyclical demand shock that amplifies the effects of the underlying food shortage.

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This paper was revised on May 8, 2013

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Commentary on this chapter: Comment, Ron Trostle
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