International Trade, Factor-Market Distortions, and the Optimal Dynamic Subsidy: Reply
Is Version Of
James Cassing and Jack Ochs' comment is, I believe, a very interesting extension of the analysis of my paper. Their two basic results are: (i) that congestion will occur in the search for jobs; and (ii) that given costly labor mobility, private decisions regarding voluntary quits will yield a socially optimal adjustment path if individuals have perfect foresight and if there is no congestion (externality) in the search process. Thus, they argue that even if factor prices are not rigid, the presence of congestion in the search process implies private decisions will not be socially optimal, and therefore that a subsidy will be needed to support the optimal plan.
This is a response of an article from The American Economic Review 68 (1978): 956. Posted with permission.