Factor Endowments, Democracy, and Trade Policy Divergence

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sectorspecific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents’ utility. We use this general equilibrium model to explicitly derive the ideal policies of the different socioeconomic Sebastian Galiani, Department of Economics, Washington University in St. Louis, Campus Box 1208, One Brookings Drive, St. Louis, MO 63130-4899, USA ([email protected]). Norman Schofield, Department of Political Science, Washington University in St. Louis, Campus Box 1207, One Brookings Drive, St. Louis, MO 63130-4899, USA (schofield.norman@ gmail.com). Gustavo Torrens, Department of Economics, Washington University in St. Louis, Campus Box 1208, One Brookings Drive, St. Louis, MO 63130-4899, USA ([email protected]). We appreciate very helpful comments from two anonymous referees, Daniel Heymann, David Levine, Paulo Somaini, Donald Saari, and participants at World Congress of the Econometric Society 2010, the International Conference on Political Economy and Institutions 2010, APET Meeting 2010, Annual Meeting of DEGIT 2010, and Annual Meeting of LACEA 2010, the Meeting of SAET, 2011, and seminar participants at World Bank, Washington University in St. Louis, and Universidad de San Andrés. Norman Schofield acknowledges financial support from NSF grant 0715929 and Sebastian Galiani acknowledges financial support from ESRC grant 062-23-1360. Received November 17, 2010; Accepted January 18, 2012. C © 2013 Wiley Periodicals, Inc. Journal of Public Economic Theory, 00 (0), 2013, pp. 1–38.