Labor Adjustment and Gradual Reform: Is Commitment Important

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.


Issue Date:
1994-10
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/201474
Total Pages:
44
JEL Codes:
F13; J20; J24
Series Statement:
WP-731




 Record created 2017-04-01, last modified 2017-10-16

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