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 modeling 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 of retarding 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 "targetting" principle of Bhagwati-Ramaswami-Johnson.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 35.
Date of creation: 01 Jan 1997
Date of revision:
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general equilibrium; gradualism; political economy; second-best theory; shock therapy; structural adjustment; transitional economies;
Other versions of this item:
- Dehejia, Vivek, 1997. "Optimal Restructuring Under a Political Constraint: A General Equilibrium Approach," CEPR Discussion Papers 1619, C.E.P.R. Discussion Papers.
- F11 - International Economics - - Trade - - - Neoclassical Models of Trade
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-04-03 (All new papers)
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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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