Trade Policy and Redistribution when Preferences are Non-Homothetic
We compare redistribution through trade restrictions vs. domestic lump-sum transfers. When preferences are non-homothetic, even domestic lump-sum transfers affect relative prices. Thus, contrary to the conventional wisdom, domestic lump-sum transfers are not necessarily superior to distortionary trade policy. We develop this argument in the context of food export bans imposed by many developing countries in the late 2000s.
We are grateful to Alan Deardorff and Bob Staiger for insightful comments. The findings, interpretations, and conclusions expressed do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, nor those of the Executive Directors of the World Bank or the governments they represent, nor those of the National Bureau of Economic Research.
Do, Quy-Toan & Levchenko, Andrei A., 2017. "Trade policy and redistribution when preferences are non-homothetic," Economics Letters, Elsevier, vol. 155(C), pages 92-95. citation courtesy of