Economic Openness and Preferences for Spending: The Role of Regional Concentration

Does regional concentration of economic activity shape levels of support for trade-induced compensation? If so, how? This paper proposes and tests a theory to explain differences in spending outcomes under trade openness. In contrast to standard comparative political economy arguments based on occupational skill specificity (Iversen & Soskice 2001, Rehm 2009), this paper argues that regional concentration of industry matters for preferences over spending because it shapes levels of risk across skill levels. It emphasises two mechanisms: regional concentration shapes the probability of re-employment in a region, holding skill constant, and it interacts with skill specificity to increase levels of risk in the event of downturn. This shapes both the overall level and the composition of support for trade-induced insurance. Evidence from a cross-section of European regions is consistent with the regional concentration argument. The findings show that the extent to which economic activity is regionally concentrated shapes demand for insurance. The paper thus contributes to the literature on the globalization-spending nexus by explicitly examining the effect of trade on preferences over the composition of spending, and by looking at the regional dynamics underlying such a connection, hitherto largely unexplored.