Working Paper: NBER ID: w2705
Authors: Raquel Fernandez
Abstract: This paper examines the optimal labor contract in a small open economy with incomplete markets under international price uncertainty. The effect on employment, wages, and profits of different realizations of the state of nature is studied and agents' preferences concerning the implementation of a tariff are determined. The implicit contract equilibrium is shown to be constrained Pareto optimal; unanticipated tariff policy cannot be Pareto improving over free trade.
Keywords: tariffs; unemployment; incomplete markets; implicit contracts
JEL Codes: F13; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tariffs (F19) | Employment in sectors with unemployment (J68) |
| Tariffs (F19) | Welfare (I38) |
| Tariffs (F19) | Wage-employment decisions (J31) |
| Employment in sectors with unemployment (J68) | Welfare (I38) |
| Implicit contracts (D86) | Wage-employment decisions (J31) |
| Tariffs (F19) | No Pareto improvement over free trade (F11) |