DP1094 Labour Adjustment and Gradual Reform: Is Commitment Important?
|Author(s):||Larry Karp, Thierry Paul|
|Publication Date:||January 1995|
|Keyword(s):||Adjustment Costs, Dynamic Tariffs, Markov Perfection, Time Inconsistency|
|JEL(s):||F13, J20, J24|
|Programme Areas:||International Trade and Regional Economics, Human Resources|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1094|
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.