Do Not Cite Without Permission Trade Policy , Income Risk and Welfare ∗

This paper studies empirically the relationship between trade policy and individual income risk and uses the empirical estimates of this relationship to asses the welfare costs of changes in trade policy. The empirical analysis proceeds in two steps. First, longitudinal data on income of Mexican workers are used to estimate individual income risk in various manufacturing sectors. Second, the variation in income risk and trade barriers − both over time and across sectors − is used to arrive at estimates of the relationship between trade policy and individual income risk. Given the estimate of this relationship, a simple dynamic general equilibrium model with incomplete markets is used to calculate the associated welfare effects of changes in trade policy. ∗We are grateful to Pierre-Olivier Gourinchas, Peter Howitt and seminar participants at Columbia, Brown, Johns Hopkins, U Penn, Princeton, NYU and Syracuse University for helpful comments and discussions and to Jungjin Lee for excellent research assistance. †Corresponding Author. Current contact address: Department of Economics, Fisher Hall, Princeton University, Princeton, NJ 08544. Email: [email protected]