Economic geography and the politics of compensation under trade

Why do some governments compensate losers for the adverse effects of trade, while others reward winners, often exacerbating distributive conflict and inequality? A standard view in the literature is that trade leads to greater demand and supply of social policy. But this explanation cannot account for the striking policy differences across countries for given levels of trade exposure. I argue that economic geography and electoral institutions condition the effect of trade exposure on compensation. Trade leads to greater compensation when losers are geographically concentrated and politicians have incentives to target specific constituencies. Relative to geographically dispersed trade losers, concentrated losers constitute attractive targets for politicians elected in small electoral districts. This conditional theory contrasts with views positing a generalized relationship between trade and welfare spending.