Adjustment Costs and General Equilibrium Effects in Transitional Economies

We compare the advantages of targeting either the growing sector or the shrinking sector in an economy where migration occurs too slowly, and the government has only second-best policy instruments. If the government is able to make commitments, we show (in a special case) that it should target the growing sector. If the government cannot make commitments about future policy, it should target the shrinking sector. If it makes a mistake and targets the growing sector, equilibrium intervention may lower social welfare. These results arise in a model where inter-sectoral migration uses a mobile factor, such as skilled labor