Optimal Tax-Subsidy Policies for Industrial Adjustment to Uncertain Shocks

Robin Boadway and David Wildasin

Oxford Economic Papers, 1990, vol. 42, issue 1, 105-34

Abstract: This paper analyzes the role of government policy when random shocks affect particular industries, occupations, or regions. Workers can freely choose an industry or occupation ex ante, and can relocate, but only at a cost, once uncertainty is resolved. The policy instruments available to the government are per capita taxes and subsidies. These are chosen either to maximize ex post utilitarian aggregate welfare, treating the initial assignment of workers as exogenously fixed (ex post optimal policy), or to maximize the ex ante expected utility of a representative workers, taking the effect of policy choice on the ex ante allocation of labor into account (ex ante optimal). Ex ante and ex post optimal policies are compared, with or without institutional constraints on the set of instruments. Optimal policies range from complete equalization of net incomes across workers to no equalizing transfers at all depending on the instruments available and the nature of relocation costs. Copyright 1990 by Royal Economic Society.

Date: 1990
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