Labour Adjustment and Gradual Reform: Is Commitment Important?

Larry Karp and Thierry Paul

No 1094, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Adjustment Costs; Dynamic Tariffs; Markov Perfection; Time Inconsistency (search for similar items in EconPapers)
JEL-codes: F13 J20 J24 (search for similar items in EconPapers)
Date: 1995-01
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Related works:
Working Paper: LABOR ADJUSTMENT AND GRADUAL REFORM: IS COMMITMENT IMPORTANT? (1994)
Working Paper: Labor Adjustment and Gradual Reform: Is Commitment Important (1994)
Working Paper: Labor Adjustment and Gradual Reform:Is Commitment Important? (1994)
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