Unintended consequences: can the rise of the educated class...
Transcript of Unintended consequences: can the rise of the educated class...
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Introduction Trade Political economy Dynamics Conclusions Appendix
Unintended consequences:can the rise of the educated class explain the
revival of protectionism?
Paolo Giordani1 Fabio Mariani2,3
1LUISS, Rome
2IRES, Université Catholique de Louvain
3IZA, Bonn
ABCDE Conference, World Bank, 17-18 June 2019
Paolo Giordani Unintended consequences
![Page 2: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/2.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Motivation and research question
Protectionism is on the rise in Western democracies: Brexit, US,Italy, etc.
Tradehas distributive effects (winners and losers), butbrings about aggregate gains.
Why emptying the baby out with the bathwater?
Our politico-economic explanation:the (endogenous) rise of the educated class erodes the politicalsupport for redistribution, so that the losers from trade preferprotectionism
Fact 1 Fact 2 Fact 3
Paolo Giordani Unintended consequences
![Page 3: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/3.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Motivation and research question
Protectionism is on the rise in Western democracies: Brexit, US,Italy, etc.
Tradehas distributive effects (winners and losers), butbrings about aggregate gains.
Why emptying the baby out with the bathwater?
Our politico-economic explanation:the (endogenous) rise of the educated class erodes the politicalsupport for redistribution, so that the losers from trade preferprotectionism
Fact 1 Fact 2 Fact 3
Paolo Giordani Unintended consequences
![Page 4: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/4.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Motivation and research question
Protectionism is on the rise in Western democracies: Brexit, US,Italy, etc.
Tradehas distributive effects (winners and losers), butbrings about aggregate gains.
Why emptying the baby out with the bathwater?
Our politico-economic explanation:the (endogenous) rise of the educated class erodes the politicalsupport for redistribution, so that the losers from trade preferprotectionism
Fact 1 Fact 2 Fact 3
Paolo Giordani Unintended consequences
![Page 5: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/5.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Motivation and research question
Protectionism is on the rise in Western democracies: Brexit, US,Italy, etc.
Tradehas distributive effects (winners and losers), butbrings about aggregate gains.
Why emptying the baby out with the bathwater?
Our politico-economic explanation:the (endogenous) rise of the educated class erodes the politicalsupport for redistribution, so that the losers from trade preferprotectionism
Fact 1 Fact 2 Fact 3
Paolo Giordani Unintended consequences
![Page 6: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/6.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Our model: overview
Our theory is articulated into three parts:
1 a simple specific-factor trade model à la Ricardo-Viner(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;
2 political economy: two-stage voting game on trade opennessand redistribution;
3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.
Paolo Giordani Unintended consequences
![Page 7: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/7.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Our model: overview
Our theory is articulated into three parts:1 a simple specific-factor trade model à la Ricardo-Viner
(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;
2 political economy: two-stage voting game on trade opennessand redistribution;
3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.
Paolo Giordani Unintended consequences
![Page 8: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/8.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Our model: overview
Our theory is articulated into three parts:1 a simple specific-factor trade model à la Ricardo-Viner
(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;
2 political economy: two-stage voting game on trade opennessand redistribution;
3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.
Paolo Giordani Unintended consequences
![Page 9: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/9.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Our model: overview
Our theory is articulated into three parts:1 a simple specific-factor trade model à la Ricardo-Viner
(Jones, 1971; Mussa, 1974; Mayer, 1974; Neary, 1978) withdistributive implications;
2 political economy: two-stage voting game on trade opennessand redistribution;
3 dynamics: taxes finance a public good, which promoteshuman capital accumulation.
Paolo Giordani Unintended consequences
![Page 10: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/10.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Literature
Our research is related to several strands of literature, i.e.1 political attitudes towards globalization:
Colantone and Stanig (2018a, 2018b), Dippel et al. (2015), Beckeret al. (2016) Jensen et al. (2016), Autor et al. (2016), Rodrik(2018), Grossman and Helpman (2018), Pastor and Veronesi (2019)
2 determinants of populism:Guiso et al. (2017, 2018), Inglehart and Norris (2016)
3 distributive effects of trade:Grossman et al. (2017), Burstein and Vogel (2017),Vannoorenberghe and Janeba (2016)
4 human capital accumulation and inequality:Galor (2011), Benabou (1996), Zeira (2007)
Paolo Giordani Unintended consequences
![Page 11: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/11.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Literature
Our research is related to several strands of literature, i.e.1 political attitudes towards globalization:
Colantone and Stanig (2018a, 2018b), Dippel et al. (2015), Beckeret al. (2016) Jensen et al. (2016), Autor et al. (2016), Rodrik(2018), Grossman and Helpman (2018), Pastor and Veronesi (2019)
2 determinants of populism:Guiso et al. (2017, 2018), Inglehart and Norris (2016)
3 distributive effects of trade:Grossman et al. (2017), Burstein and Vogel (2017),Vannoorenberghe and Janeba (2016)
4 human capital accumulation and inequality:Galor (2011), Benabou (1996), Zeira (2007)
Paolo Giordani Unintended consequences
![Page 12: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/12.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
The economic environment: industries and agents
Two perfectly competitive industries:exporting (X ), andimporting (M).
Population of unit mass:λ ∈ (1/2, 1) workers, and1 − λ entrepreneurs.
Paolo Giordani Unintended consequences
![Page 13: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/13.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
The economic environment: industries and agents
Two perfectly competitive industries:exporting (X ), andimporting (M).
Population of unit mass:λ ∈ (1/2, 1) workers, and1 − λ entrepreneurs.
Paolo Giordani Unintended consequences
![Page 14: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/14.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Industries and agents
Entrepreneurs are sector-specific:– γ (1 − λ) in sector X (denoted by x),– (1 − γ) (1 − λ) in sector M (denoted by m).
As far as workers are concerned,– σλ are skilled (s) and perfectly mobile across industries,– (1 − σ)λ are unskilled (u) and imperfectly mobile.
Paolo Giordani Unintended consequences
![Page 15: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/15.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Industries and agents
Entrepreneurs are sector-specific:– γ (1 − λ) in sector X (denoted by x),– (1 − γ) (1 − λ) in sector M (denoted by m).
As far as workers are concerned,– σλ are skilled (s) and perfectly mobile across industries,– (1 − σ)λ are unskilled (u) and imperfectly mobile.
Paolo Giordani Unintended consequences
![Page 16: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/16.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Production
Production in the two sectors takes place according to
YX = AP [γ (1 − λ)]1−α−β [θsσλ]α [θu (1 − σ)λ]β (1)
and
YM = [(1 − γ) (1 − λ)]1−α−β [(1 − θs)σλ]α [(1 − θu) (1 − σ)λ]β ,
(2)where:
– θs and θu are (endogenous) labor shares (in X ),– A ∈ R+ is TFP in X ,– P ∈ [P,P] is the relative price in sector X (↪→ proxy for trade
openness, as in Grossman et al. (2017), etc.).
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Factor allocation
Factors are paid their marginal productivity (MP).The allocation of workers (θs , θu) is obtained from factor incomeequalization:
yM,i = yX ,i for i = s, u.
For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X , so that
MPM,u =MPX ,uφP , (3)
with φ > 0.
Paolo Giordani Unintended consequences
![Page 18: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/18.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Factor allocation
Factors are paid their marginal productivity (MP).The allocation of workers (θs , θu) is obtained from factor incomeequalization:
yM,i = yX ,i for i = s, u.
For the skilled, MPM,s = MPX ,s .
Unskilled workers incur an access cost to sector X , so that
MPM,u =MPX ,uφP , (3)
with φ > 0.
Paolo Giordani Unintended consequences
![Page 19: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/19.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Factor allocation
Factors are paid their marginal productivity (MP).The allocation of workers (θs , θu) is obtained from factor incomeequalization:
yM,i = yX ,i for i = s, u.
For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X ,
so that
MPM,u =MPX ,uφP , (3)
with φ > 0.
Paolo Giordani Unintended consequences
![Page 20: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/20.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Factor allocation
Factors are paid their marginal productivity (MP).The allocation of workers (θs , θu) is obtained from factor incomeequalization:
yM,i = yX ,i for i = s, u.
For the skilled, MPM,s = MPX ,s .Unskilled workers incur an access cost to sector X , so that
MPM,u =MPX ,uφP , (3)
with φ > 0.
Paolo Giordani Unintended consequences
![Page 21: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/21.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Trade and factor incomes
After finding θ∗s and θ∗u, we can study how incomes depend ontrade openness
Lemma 1An increase in P (i) raises yx and ys , (ii) lowers ym, and (iii) lowersyu as long as φP > 1.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Trade and factor incomes
After finding θ∗s and θ∗u, we can study how incomes depend ontrade openness
Lemma 1An increase in P (i) raises yx and ys , (ii) lowers ym, and (iii) lowersyu as long as φP > 1.
Paolo Giordani Unintended consequences
![Page 23: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/23.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Ranking of incomes
Assumption 1Parameters are such that:
1 σ <α
α+ β;
2 P >φ
β1−β
A1
1−β
(α (1 − λ) (1 − γ)
λσ (1 − α− β)− αγ (1 − λ)
) 1−α−β1−β
;
3 P <φ
β1−β
A1
1−β
(λσ (1 − α− β)− α (1 − γ) (1 − λ)
αγ (1 − λ)
) 1−α−β1−β
.
The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.
Lemma 2Under Assumption 1, we have yx , ym > ys > yu.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Ranking of incomes
Assumption 1Parameters are such that:
1 σ <α
α+ β;
2 P >φ
β1−β
A1
1−β
(α (1 − λ) (1 − γ)
λσ (1 − α− β)− αγ (1 − λ)
) 1−α−β1−β
;
3 P <φ
β1−β
A1
1−β
(λσ (1 − α− β)− α (1 − γ) (1 − λ)
αγ (1 − λ)
) 1−α−β1−β
.
The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.
Lemma 2Under Assumption 1, we have yx , ym > ys > yu.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Ranking of incomes
Assumption 1Parameters are such that:
1 σ <α
α+ β;
2 P >φ
β1−β
A1
1−β
(α (1 − λ) (1 − γ)
λσ (1 − α− β)− αγ (1 − λ)
) 1−α−β1−β
;
3 P <φ
β1−β
A1
1−β
(λσ (1 − α− β)− α (1 − γ) (1 − λ)
αγ (1 − λ)
) 1−α−β1−β
.
The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.
Lemma 2Under Assumption 1, we have yx , ym > ys > yu.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Ranking of incomes
Assumption 1Parameters are such that:
1 σ <α
α+ β;
2 P >φ
β1−β
A1
1−β
(α (1 − λ) (1 − γ)
λσ (1 − α− β)− αγ (1 − λ)
) 1−α−β1−β
;
3 P <φ
β1−β
A1
1−β
(λσ (1 − α− β)− α (1 − γ) (1 − λ)
αγ (1 − λ)
) 1−α−β1−β
.
The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.
Lemma 2Under Assumption 1, we have yx , ym > ys > yu.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Ranking of incomes
Assumption 1Parameters are such that:
1 σ <α
α+ β;
2 P >φ
β1−β
A1
1−β
(α (1 − λ) (1 − γ)
λσ (1 − α− β)− αγ (1 − λ)
) 1−α−β1−β
;
3 P <φ
β1−β
A1
1−β
(λσ (1 − α− β)− α (1 − γ) (1 − λ)
αγ (1 − λ)
) 1−α−β1−β
.
The above restrictions on the parameter space allow us to “freeze” theranking of incomes, thus simplifying the analysis.
Lemma 2Under Assumption 1, we have yx , ym > ys > yu.
Paolo Giordani Unintended consequences
![Page 28: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/28.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Setting up the problem
We consider a two-stage voting game, in which agents decide bymajority on
1 trade openness (P),2 taxation (τ).
Utility depends on consumption of private and public goods:
U (cX , cM ,G) = cµX c1−µ
M + δ lnG . (4)
with µ ∈ (0, 1) and δ > 0.The government budget constraint is
G = τY , (5)
with Y = PYX + YM .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Setting up the problem
We consider a two-stage voting game, in which agents decide bymajority on
1 trade openness (P),2 taxation (τ).
Utility depends on consumption of private and public goods:
U (cX , cM ,G) = cµX c1−µ
M + δ lnG . (4)
with µ ∈ (0, 1) and δ > 0.
The government budget constraint is
G = τY , (5)
with Y = PYX + YM .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Setting up the problem
We consider a two-stage voting game, in which agents decide bymajority on
1 trade openness (P),2 taxation (τ).
Utility depends on consumption of private and public goods:
U (cX , cM ,G) = cµX c1−µ
M + δ lnG . (4)
with µ ∈ (0, 1) and δ > 0.The government budget constraint is
G = τY , (5)
with Y = PYX + YM .Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Political preferences over taxation
The preferred tax rate by agent i = {s, u, x ,m} is
τ∗i =δ(
P1−µ
)1−µ ( 1µ
)µ
yi. (6)
Given Lemma 1, political preferences on taxation can be ranked asfollowsLemma 3Under Assumption 1, we have τ∗u > τ∗s > τ∗m, τ
∗x .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Political preferences over taxation
The preferred tax rate by agent i = {s, u, x ,m} is
τ∗i =δ(
P1−µ
)1−µ ( 1µ
)µ
yi. (6)
Given Lemma 1, political preferences on taxation can be ranked asfollowsLemma 3Under Assumption 1, we have τ∗u > τ∗s > τ∗m, τ
∗x .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on taxation
Political preferences are aggregated by majority voting, where τM
is the preferred tax rate of the median voter.
Proposition 1The median voter on τ is always a worker, unskilled ifλ (1 − σ) ≥ 1/2 and skilled otherwise, i.e.
τM =
τ∗u if σ ≤ 1 − 1
2λτ∗s if σ > 1 − 1
2λ.(7)
Let us defineσ′ ≡ 1 − 1
2λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on taxation
Political preferences are aggregated by majority voting, where τM
is the preferred tax rate of the median voter.
Proposition 1The median voter on τ is always a worker, unskilled ifλ (1 − σ) ≥ 1/2 and skilled otherwise, i.e.
τM =
τ∗u if σ ≤ 1 − 1
2λτ∗s if σ > 1 − 1
2λ.(7)
Let us defineσ′ ≡ 1 − 1
2λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on taxation
Political preferences are aggregated by majority voting, where τM
is the preferred tax rate of the median voter.
Proposition 1The median voter on τ is always a worker, unskilled ifλ (1 − σ) ≥ 1/2 and skilled otherwise, i.e.
τM =
τ∗u if σ ≤ 1 − 1
2λτ∗s if σ > 1 − 1
2λ.(7)
Let us defineσ′ ≡ 1 − 1
2λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Political preferences over trade openness
Individual attitudes towards P are formed by taking into accountthe outcome of the vote on τ .
Lemma 4We have the following ranking of preferences over trade openness(across types):
P∗x (τ
M) > P∗s (τ
M) > P∗u(τ
M) > P∗m(τ
M).
In the absence of adequate redistribution, the losers from tradewould like to reduce trade openness.
Lemma 5Unskilled workers become more hostile to trade when the medianvoter on τ becomes a skilled worker, i.e. P∗
u (τ∗s ) < P∗u (τ∗u ) .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Political preferences over trade openness
Individual attitudes towards P are formed by taking into accountthe outcome of the vote on τ .
Lemma 4We have the following ranking of preferences over trade openness(across types):
P∗x (τ
M) > P∗s (τ
M) > P∗u(τ
M) > P∗m(τ
M).
In the absence of adequate redistribution, the losers from tradewould like to reduce trade openness.
Lemma 5Unskilled workers become more hostile to trade when the medianvoter on τ becomes a skilled worker, i.e. P∗
u (τ∗s ) < P∗u (τ∗u ) .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Political preferences over trade openness
Individual attitudes towards P are formed by taking into accountthe outcome of the vote on τ .
Lemma 4We have the following ranking of preferences over trade openness(across types):
P∗x (τ
M) > P∗s (τ
M) > P∗u(τ
M) > P∗m(τ
M).
In the absence of adequate redistribution, the losers from tradewould like to reduce trade openness.
Lemma 5Unskilled workers become more hostile to trade when the medianvoter on τ becomes a skilled worker, i.e. P∗
u (τ∗s ) < P∗u (τ∗u ) .
Paolo Giordani Unintended consequences
![Page 39: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/39.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on trade openness
Preferences on trade openness are also aggregated by majorityvoting.
Proposition 2The median voter on P is always a worker, unskilled ifλ (1 − σ) + (1 − λ) (1 − γ) ≥ 1/2 and skilled otherwise, i.e.
PM =
P∗
u if σ ≤ 12λ − γ (1 − λ)
λ
P∗s if σ >
12λ − γ (1 − λ)
λ
(8)
Let us defineσ′′ ≡ 1
2λ − γ (1 − λ)
λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on trade openness
Preferences on trade openness are also aggregated by majorityvoting.
Proposition 2The median voter on P is always a worker, unskilled ifλ (1 − σ) + (1 − λ) (1 − γ) ≥ 1/2 and skilled otherwise, i.e.
PM =
P∗
u if σ ≤ 12λ − γ (1 − λ)
λ
P∗s if σ >
12λ − γ (1 − λ)
λ
(8)
Let us defineσ′′ ≡ 1
2λ − γ (1 − λ)
λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Voting on trade openness
Preferences on trade openness are also aggregated by majorityvoting.
Proposition 2The median voter on P is always a worker, unskilled ifλ (1 − σ) + (1 − λ) (1 − γ) ≥ 1/2 and skilled otherwise, i.e.
PM =
P∗
u if σ ≤ 12λ − γ (1 − λ)
λ
P∗s if σ >
12λ − γ (1 − λ)
λ
(8)
Let us defineσ′′ ≡ 1
2λ − γ (1 − λ)
λ.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;
(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;
(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The political equilibrium
(1) If σ ≤ σ′, u is median voter onboth τ and P;(2) If σ′ < σ ≤ σ′′, u is medianvoter on P, s is median voter on τ ;(3) If σ > σ′′, s is median voter onboth τ and P.
1σ
λ
(1) (2) (3)
1/2
1
0
Proposition 3The political equilibrium is such that
(PM , τM) =
(P∗
u (τ∗u ) , τ∗u ) if σ ≤ σ′ (reg. 1)
(P∗u (τ∗s ) , τ
∗s ) if σ′ < σ ≤ σ′′ (reg. 2)
(P∗s (τ∗s ) , τ
∗s ) if σ > σ′′ (reg. 3)
(9)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Human capital accumulation (social mobility)
We now endogenize the proportion of skilled agents, σ.
The evolution of σ is described by
σt+1 = πSSσt + πUS (1 − σt) , (10)
where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.Social mobility is driven by G (e.g. public education):
πSS = (1 − ζ)χSS + ζηGt
1 + Gt, (11)
andπUS = (1 − ζ)χUS + ζ
ηGt1 + Gt
, (12)
where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Human capital accumulation (social mobility)
We now endogenize the proportion of skilled agents, σ.The evolution of σ is described by
σt+1 = πSSσt + πUS (1 − σt) , (10)
where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.
Social mobility is driven by G (e.g. public education):
πSS = (1 − ζ)χSS + ζηGt
1 + Gt, (11)
andπUS = (1 − ζ)χUS + ζ
ηGt1 + Gt
, (12)
where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Human capital accumulation (social mobility)
We now endogenize the proportion of skilled agents, σ.The evolution of σ is described by
σt+1 = πSSσt + πUS (1 − σt) , (10)
where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.Social mobility is driven by G (e.g. public education):
πSS = (1 − ζ)χSS + ζηGt
1 + Gt, (11)
andπUS = (1 − ζ)χUS + ζ
ηGt1 + Gt
, (12)
where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Human capital accumulation (social mobility)
We now endogenize the proportion of skilled agents, σ.The evolution of σ is described by
σt+1 = πSSσt + πUS (1 − σt) , (10)
where πSS (πUS) is the probability that a skilled (unskilled) workerhas a skilled offspring.Social mobility is driven by G (e.g. public education):
πSS = (1 − ζ)χSS + ζηGt
1 + Gt, (11)
andπUS = (1 − ζ)χUS + ζ
ηGt1 + Gt
, (12)
where ζ ∈ (0, 1), η ∈ R+ and χSS > χUS .Paolo Giordani Unintended consequences
![Page 53: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/53.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
The transition function
For simplicity, we restrict trade policy to a binary choice, so thatP ∈
{P,P
}.
The transition function for σ is given by
σt+1 =
f1 (σt) if σt ≤ σ′
f2 (σt) if σ′ < σt ≤ σ′′
f3 (σt) if σt > σ′′(13)
where fi (σt) depends on the specific political equilibrium prevailingat time t.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
The transition function
For simplicity, we restrict trade policy to a binary choice, so thatP ∈
{P,P
}.
The transition function for σ is given by
σt+1 =
f1 (σt) if σt ≤ σ′
f2 (σt) if σ′ < σt ≤ σ′′
f3 (σt) if σt > σ′′(13)
where fi (σt) depends on the specific political equilibrium prevailingat time t.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Example: protectionist SS
σt
σt+1
(1) (2) (3)σt+1=σt
σt+1=f(σt)
σ' σ''
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Example: free-trade SS
σt
σt+1
(1) (2) (3)σt+1=σt
σt+1=f(σt)
σ' σ''
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade openness
Protectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline
because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking population
In our model, globalization breeds its declinebecause it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
![Page 59: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/59.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline
because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
![Page 60: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/60.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline
because it helps the emergence of the educated class,
which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline
because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,
thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
![Page 62: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/62.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
Conclusions
We have analyzed an economy in which citizens vote onredistribution and trade opennessProtectionism arises endogenously as a by-product of the lowerlevel of redistribution commanded by an ever more educatedworking populationIn our model, globalization breeds its decline
because it helps the emergence of the educated class,which in turn weakens the political support for redistribution,thus increasing the demand for protectionism.
Paolo Giordani Unintended consequences
![Page 63: Unintended consequences: can the rise of the educated class …pubdocs.worldbank.org/en/979451560880945985/uc-DC.pdf · Paolo Giordani Unintended consequences..... Introduction Trade](https://reader033.fdocuments.net/reader033/viewer/2022042923/5f71d35fbec994147c3b22de/html5/thumbnails/63.jpg)
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Introduction Trade Political economy Dynamics Conclusions Appendix
The rise of the educated class (OECD)
BackSource: own elaborations on OECD data
6
7
8
9
10
11
12
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Rise of the educated class
Totale
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Trade Openness and Social Expenditure (OECD)
BackSource: own elaborations on OECD data
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Globalization and redistribution (or the lack thereof)
OECD countries: trade openness and social expenditureBack
Source: own elaborations on OECD data
AUS
AUTBEL
CAN
CHECZE
DEUDNK
ESP
FINFRA
GBRGRC
IRLITA
JPN
NLD
NORNZL
POL
PRT
SWE
USA
0
5
10
15
20
25
30
0 20 40 60 80 100 120 140
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (1985-90)
AUS
AUT BEL
CAN
CHECZE
DEU DNK
ESP
FINFRA
GBRGRC IRLISL
ITA
JPN
NLDNOR
NZLPOL
PRT
SVN
SWE
USA
0
5
10
15
20
25
30
35
0 20 40 60 80 100 120 140
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (1990-95)
AUS
AUTBEL
CAN
CHE
CZE
DEU DNK
ESP
EST
FINFRA
GBRGRCHUN
IRLISL
ITA
JPN
NLDNOR
NZL
POL
PRT
SVN
SWE
USA
0
5
10
15
20
25
30
35
0 20 40 60 80 100 120 140 160
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (1995-00)
AUS
AUTBEL
CANCHE
CZE
DEUDNK
ESP
EST
FIN
FRA
GBRGRC
HUN
IRLISL
ITA
JPN
NLDNORNZL
POLPRTSVN
SWE
USA
0
5
10
15
20
25
30
0 20 40 60 80 100 120 140 160 180
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (2000-05)
AUS
AUT BEL
CANCHE
CZE
DEU DNK
ESP
EST
FIN
FRA
GBRGRC HUN
IRL
ISL
ITA
JPN NLDNOR
NZLPOL
PRT SVN
SWE
USA
0
5
10
15
20
25
30
35
0 20 40 60 80 100 120 140 160 180
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (2005-10)
AUS
AUT BEL
CANCHE
CZE
DEU
DNK
ESP
EST
FINFRA
GBR
GRC
HUNIRL
ISL
ITA
JPN
NLD
NOR
NZL POL
PRT SVN
SWE
USA
0
5
10
15
20
25
30
35
0 50 100 150 200 250
Soci
al e
xpen
dit
ure
Openness
Openness and social expenditure (2010-15)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Inequality before and after redistribution (Europe Vs. US)Source: Blanchet et al. (2019)
Paolo Giordani Unintended consequences
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Introduction Trade Political economy Dynamics Conclusions Appendix
Inequality before and after redistribution (OECD)Source: own elaborations on OECD data
20
25
30
35
40
45
50
55
1990 1995 2000 2005 2010 2015
Gini market and Gini disposable (1990-2014)
Serie1 Serie2
Paolo Giordani Unintended consequences