DP11890 Trade Policy and Redistribution when Preferences are Non-Homothetic

Author(s): Quy-Toan Do, Andrei A. Levchenko
Publication Date: March 2017
Keyword(s): non-homothetic preferences, redistribution, trade restrictions
JEL(s): F13, O24, Q17
Programme Areas: International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11890

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.