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Labour Adjustment and Gradual Reform: Is Commitment Important?

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  • Karp, Larry
  • Paul, Thierry

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.

Suggested Citation

  • Karp, Larry & Paul, Thierry, 1995. "Labour Adjustment and Gradual Reform: Is Commitment Important?," CEPR Discussion Papers 1094, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1094
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    Cited by:

    1. Karp, Larry, 1995. "The Direction and Timing of Agricultural Trade Refonn in Central and East Europe," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9z61f67x, Department of Agricultural & Resource Economics, UC Berkeley.
    2. Karp, Larry, 1995. "The Direction and Timing of Agricultural Trade Refonn in Central and East Europe," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9z61f67x, Department of Agricultural & Resource Economics, UC Berkeley.

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    More about this item

    Keywords

    Adjustment Costs; Dynamic Tariffs; Markov Perfection; Time Inconsistency;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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