Tariffs in an Economy with Incomplete Markets and Unemployment
29 Pages Posted: 25 May 2011 Last revised: 24 May 2021
Date Written: September 1988
This paper examines the optimal labor contract in a small open economy with incomplete markets under international price uncertainty. The effect on employment, wages, and profits of different realizations of the state of nature is studied and agents' preferences concerning the implementation of a tariff are determined. The implicit contract equilibrium is shown to be constrained Pareto optimal; unanticipated tariff policy cannot be Pareto improving over free trade.
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