Working Paper: CEPR ID: DP856
Authors: Larry Karp; Thierry Paul
Abstract: We study the dynamics of optimal trade policy in a model with costly inter-sectoral adjustment of labour, where migrants pay less than the marginal social cost of migration. If workers have rational expectations, a future tariff has an announcement effect on the current migration decision. If the government is able to commit itself to future policy, the optimal trajectory involves phasing in and then phasing out protection of the dying sector. This contrasts with recommendations of gradual liberalization. Without the ability to make commitments, the equilibrium policy begins with and maintains free trade.
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 (H81) | trade policy (F13) |
| lack of commitment (J22) | immediate and complete liberalization (P39) |
| future tariff expectations (F17) | migration decisions (F22) |
| current tariffs (F19) | migration decisions (F22) |
| adjustment costs (J30) | migration decisions (F22) |
| initial tariff must be zero (F14) | trade policy effectiveness (F13) |