Suchergebnisse

We develop a political economy model where loss aversion and reference dependence are important in shaping people's preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61)

We address the effect of expectation‐based consumer loss aversion on firm strategy in imperfect competition. Consumers are fully informed about match value and price at the moment of purchase. However, some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution, whereas others are perfectly informed all the time. We show that if firms have symmetric costs, a larger share of informed consumers leads to a more competitive outcome. The reverse holds if cost asymmetry in duopoly is sufficiently large.

PROSPECT THEORY OFFERS POWERFUL INSIGHTS AND PROPOSITIONS INTO POLITICAL DECISION-MAKING, ESPECIALLY IN INTERNATIONAL POLITICS. EVIDENCE INDICATES THAT STATESMENT ARE INDEED RISK-ACCEPTANT FOR LOSSES. THIS WOULD HELP EXPLAIN OBSERVED PATTERNS IN BARGAINING, DETERRENCE, THE ORGINS OF WARS, AS WELL AS SUGGESTING WHY STATES ARE LESS LIKELY TO BEHAVE AGGRESSIVELY WHEN DOING SO WOULD PRODUCE GAINS THAN WHEN SUCH BEHAVIOR MIGHT PREVENT LOSSES.