In this paper, we have constructed an Overlapping-Generations model where agents vote on whether to open or close the economy to international capital flows. If the production function has a stochastic component, the political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the risk of the productivity shocks. We find three possible equilibrium outcomes: economies that eventually remain open, those that eventually remain closed, and those that cycle between open and closed.
BGIE
36 pages
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