 Optimal Restructuring Under a Political Constraint: A General Equilibrium ApproachNo 1619, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: This paper considers the generalized second-best analytics of optimal restructuring under a political constraint, building on the modelling approach in Dehejia (1997). It is shown that the second-best optimum entails administering the terms-of-trade shock fully at the initiation of the reform, just as in shock therapy, but that this must be supplemented with interventions in domestic factor markets. The effects of these interventions are to speed up the exit of the politically affected factor, labour, and to retard the exit of the other factor, capital, both of which serve to prop-up the wages of workers in the declining sector and hence address the political constraint. The results are in the spirit of the neoclassical theory of distortions and welfare: the optimal intervention targets the affected margin directly, in consonance with the ‘targeting’ principle of Bhagwati-Ramaswami-Johnson. Keywords: General Equilibrium; Gradualism; Political Economy; Second-best Theory; Shock Therapy; Structural Adjustment; Transition Economies (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1619 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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