Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach
AbstractThis paper considers the generalized second-best analytics of optimal restructuring under a political constraint, building on the modelling approach in Dehejia (1997). It is shown that the second-best optimum entails administering the terms-of-trade shock fully at the initiation of the reform, just as in shock therapy, but that this must be supplemented with interventions in domestic factor markets. The effects of these interventions are to speed up the exit of the politically affected factor, labour, and to retard the exit of the other factor, capital, both of which serve to prop-up the wages of workers in the declining sector and hence address the political constraint. The results are in the spirit of the neoclassical theory of distortions and welfare: the optimal intervention targets the affected margin directly, in consonance with the ‘targeting’ principle of Bhagwati-Ramaswami-Johnson.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1619.
Date of creation: Apr 1997
Date of revision:
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Other versions of this item:
- Vivek H. Dehejia, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," William Davidson Institute Working Papers Series 35, William Davidson Institute at the University of Michigan.
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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- Vivek H. Dehejia & Douglas W. Dwyer, 1998.
"Output and Unemployment Dynamics in Transition,"
William Davidson Institute Working Papers Series
178, William Davidson Institute at the University of Michigan.
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