Trade Openness and Preferences for Compensation: The Role of Economic Geography

Why do losing (winning) factors receive relatively low (high) levels of welfare spending or trade protection? A prominent literature in comparative political economy explores the role of risk in shaping preferences over insurance, but has largely overlooked the role of geography. I offer an argument on preference formation based on geographical risk. I develop and test a theoretical model to determine the conditions under which individuals that lose (win) from trade are more likely to support lower (higher) levels of compensation. Specifically, I argue that the level of regional factor mobility and the degree of regional competitiveness interact to shape preferences. I assess the empirical implications of the argument using individual survey data across a sample of European regions for the years 1996 and 2006. The empirical findings strongly support the argument. Substantively, the paper moves beyond the well-studied question of whether governments increase spending in response to trade and focuses on the conditions under which different mechanisms affect material welfare and drive demand for compensation. Empirically, it draws on subnational analysis of individual preferences, improving causal inference and allowing for better specification of a spatially uneven phenomenon such as geographical risk.