Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

- Economists focus on overall welfare, politicians on the income distribution.
- Market liberalization increases welfare and changes the income distribution.
- Politicians implement distortionary policies to mitigate the distributional effects.
- With inaccurate information, ambiguous net welfare effects may result.
- Politicians may have a point when being hesitant about market liberalization.

Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.