Working Paper: CEPR ID: DP1094
Authors: Larry Karp; Thierry Paul
Abstract: We analyse a model in which a government uses a second-best policy to affect the reallocation of labour, 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.
Keywords: adjustment costs; dynamic tariffs; time inconsistency; Markov perfection
JEL Codes: F13; J20; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government commitment ability (H11) | equilibrium policy trajectories (D50) |
| perfect commitment (D41) | gradual liberalization (P39) |
| zero commitment ability (D10) | suboptimal outcomes (I14) |
| government policy (F68) | labor migration (J61) |
| government policy (F68) | unemployment dynamics (J64) |
| commitment ability (G31) | policy outcomes (D78) |
| commitment scenarios (C78) | similar policy trajectories (F68) |