Risk Perception and Comparative Advantage

This paper analyzes international trade when managers differ in their perception of risk. Managers choose between a certain activity and a risky entrepreneurial project and evaluate uncertain outcomes according to the dual theory of choice under risk. Differences in the distribution of managerial optimism across countries generate comparative advantage: the relatively optimistic country specializes in the risky commodity, while the more pessimistic country specializes in the certain one. Managerial heterogeneity also modifies the welfare effects of trade. In particular, the pessimistic country may lose from trade even according to an ex-ante welfare criterion, while the optimistic country may experience ex-post welfare losses. JEL Classification: F11; F13; D81.