Political-economy expositions of trade policy have traditionally described asset or factor ownership as not subject to change. Asset markets, however, allow individuals to change the composition of income sources. We consider an economy with stochastic productivity to show how the equilibrium composition of asset portfolios influences individual attitudes toward free trade. The model links financial market completeness and trade liberalization in the second half of the 20th century and provides a contributing answer to why governments in poorer countries without well-developed financial markets have failed to liberalize trade.
Bibliographical noteFunding Information:
We are grateful for comments from seminar participants at Bar-Ilan University, the University of Konstanz, the University of Colorado, the International Monetary Fund, the University of California at Los Angeles, Clemson University, New York University, and the University at Albany. James Anderson, Ken Beauchemin, Jose Campa, Betty Daniel, Jonathan Eaton, Raquel Fernandez, Karen Lewis, Cheryl Schonhardt-Bailey, and two anonymous referees provided comments on earlier drafts. Feeney gratefully acknowledges financial support from the National Science Foundation and the hospitality of the Stern School of Business at New York University (visitor, 1997–1998).
- Asset markets
- Political economy
- Trade liberalization