Phasing in and Phasing Out Protectionism with Costly Adjustment of Labour

Larry Karp and Thierry Paul

No 856, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the dynamics of optimal trade policy in a model with costly inter-sectoral adjustment of labour, where migrants pay less than the marginal social cost of migration. If workers have rational expectations, a future tariff has an announcement effect on the current migration decision. If the government is able to commit itself to future policy, the optimal trajectory involves phasing in and then phasing out protection of the dying sector. This contrasts with recommendations of gradual liberalization. Without the ability to make commitments, the equilibrium policy begins with and maintains free trade.

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: 1993-12
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Phasing In and Phasing Out Protectionism with Costly Adjustment of Labour (1994)
Working Paper: PHASING IN AND PHASING OUT PROTECTIONISM WITH COSTLY ADJUSTMENTS OF LABOUR (1993)
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