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Labor Adjustment and Gradual Reform:Is Commitment Important?

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  • Karp, Larry
  • Paul, Thierry

Abstract

We analyze a model in which a government uses a second best policy to affect the reallocation of labor, following a change in relative prices. We consider two extreme cases, in which the government has either unlimited or negligible ability to commit to future actions. We explain why the ability to make commitments may be unimportant, and we illustrate this conjecture with numerical examples. For either assumption about commitment ability, the equilibrium policy involves gradual liberalization. The dying sector is protected during the transition to a free market, in order to decrease the amount of unemployment. Our results are sensitive to the assumptions about migration.

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Bibliographic Info

Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt7gc7t3nm.

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Date of creation: 01 Oct 1994
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Handle: RePEc:cdl:agrebk:qt7gc7t3nm

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Keywords: adjustment costs; dynamic tariffs; time inconsistency; Markov perfection;

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  1. Cassing, James H & Ochs, Jack, 1978. "International Trade, Factor-Market Distortions, and the Optimal Dynamic Subsidy: Comment," American Economic Review, American Economic Association, vol. 68(5), pages 950-55, December.
  2. Lapan, Harvey E, 1976. "International Trade, Factor Market Distortions, and the Optimal Dynamic Subsidy," American Economic Review, American Economic Association, vol. 66(3), pages 335-46, June.
  3. Bofinger, Peter & Cernohorsky, Ivan, 1992. "Some Lessons from Economic Transformation in East Germany," CEPR Discussion Papers 686, C.E.P.R. Discussion Papers.
  4. George A. Akerlof & Andrew K. Rose & Janet L. Yellen & Helga Hessenius, 1991. "East Germany in from the Cold: The Economic Aftermath of Currency Union," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 1-106.
  5. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  6. Kiminori Matsuyama, 1987. "Perfect Equilibria in a Trade Liberalization Game," Discussion Papers 738, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Lapan, Harvey E, 1978. "International Trade, Factor-Market Distortions, and the Optimal Dynamic Subsidy: Reply," American Economic Review, American Economic Association, vol. 68(5), pages 956-59, December.
  8. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans and mutual default," Staff Report 124, Federal Reserve Bank of Minneapolis.
  9. David Begg & Richard Portes, 1993. "Eastern Germany since unification: wage subsidies remain a better way," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 1(4), pages 383-400, December.
  10. Abel, István & Bonin, John, 1992. "The `Big Bang' Versus `Slow but Steady': A Comparison of the Hungarian and the Polish Transformations," CEPR Discussion Papers 626, C.E.P.R. Discussion Papers.
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Cited by:
  1. Karp, Larry, 1995. "The Direction and Timing of Agricultural Trade Refonn in Central and East Europe," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9z61f67x, Department of Agricultural & Resource Economics, UC Berkeley.

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