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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.

Suggested Citation

  • Karp, Larry & Paul, Thierry, 1994. "Labor Adjustment and Gradual Reform:Is Commitment Important?," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7gc7t3nm, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt7gc7t3nm
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    References listed on IDEAS

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    1. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
    2. 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.
    3. 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 950-955, December.
    4. V. V. Chari & Patrick J. Kehoe, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 175-195.
    5. Matsuyama, Kiminori, 1990. "Perfect Equilibria in a Trade Liberalization Game," American Economic Review, American Economic Association, vol. 80(3), pages 480-492, June.
    6. Lapan, Harvey E, 1976. "International Trade, Factor Market Distortions, and the Optimal Dynamic Subsidy," American Economic Review, American Economic Association, vol. 66(3), pages 335-346, June.
    7. Bofinger, Peter & Cernohorsky, Ivan, 1992. "Some Lessons from Economic Transformation in East Germany," CEPR Discussion Papers 686, C.E.P.R. Discussion Papers.
    8. 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 956-959, December.
    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.

    More about this item

    Keywords

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

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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