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Abstract
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.