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Endogenous Labor Supply, Rigid Factor Prices And A Second Best Solution

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  • Lapan, Harvey E.

Abstract

The conventional wisdom asserts that distortions due to factor price rigidities should be eliminated by subsidies. However, we argue that the success of this policy rests upon the fact that the return to the factor is a pure rent. If factor supply is endogenous, then subsidies to employers and taxes on factor owners are needed to support the optimal solution. Since we believe this policy combination works only by assuming away the problem, we then devise a model to study the optimal policies in a second best world. Our results show that, in general, both factor subsidies (or taxes) and export subsidies (or taxes) are needed to achieve this constrained optimum.

Suggested Citation

  • Lapan, Harvey E., 1975. "Endogenous Labor Supply, Rigid Factor Prices And A Second Best Solution," ISU General Staff Papers 197506010700001011, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:197506010700001011
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