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Endogenous distortions in product and labor markets

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  • Rama, Martin
  • Tabellini, Guido

Abstract

The authors use the common agency approach to analyze the joint determination of product and labor market distortions in a small (developing) open economy. Capital owners and union members lobby the government on tariffs and minimum wages, while factors of production in agriculture (the informal sector) are not organized. The government cares about social welfare, but also values the contributions (monetary or else) made by organized groups. The authors show that product and labor market distortions move in the same direction in response to changes in the relevant economic and political parameters, and that the level of those distortions is not modified by social pacts between capital and labor. They also show that conditionality by foreign agencies should target product market distortions, not labor market distortions. Labor market distortions ought not to be targeted because they are second best: they are the optimal response to the product market distortions. Labor market distortions are likely to adjust in the desired direction once product market distortions are removed or diminished.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1413.

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Date of creation: 31 Jan 1995
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Handle: RePEc:wbk:wbrwps:1413

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Keywords: Labor Policies; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform; Transport and Trade Logistics; Environmental Economics&Policies; Economic Theory&Research; Banks&Banking Reform; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Health Economics&Finance;

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References

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers, Tel Aviv 21-92, Tel Aviv.
  2. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, Econometric Society, vol. 54(4), pages 923-42, July.
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Cited by:
  1. Azam, Jean-Paul & Salmon, Claire, 2003. "Strikes and Political Activism of Trade Unions: Theory and Application to Bangladesh," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 166, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Douglas Marcouiller, 1995. "Putting in politics: A review of economic models with endogenous determination of policy," Forum for Social Economics, Springer, Springer, vol. 25(1), pages 37-51, September.
  3. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2006. "The unequal effects of liberalization: evidence from dismantling the License Raj in India," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3773, London School of Economics and Political Science, LSE Library.
  4. Gil S. Epstein & Shmuel Nitzan, 2003. "Political culture and monopoly price determination," Social Choice and Welfare, Springer, Springer, vol. 21(1), pages 1-19, 08.
  5. Rama, Martin & Tabellim, Guido, 1998. "Lobbying by capital and labor over trade and labor market policies," European Economic Review, Elsevier, Elsevier, vol. 42(7), pages 1295-1316, July.

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