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Uncertainty, Specialization and Government Intervention
Author(s) -
Di Maio Michele,
Valente Marco
Publication year - 2013
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12003
Subject(s) - economics , disadvantaged , investment (military) , microeconomics , economic interventionism , simple (philosophy) , comparative advantage , mechanism (biology) , government (linguistics) , intervention (counseling) , international trade , economic growth , psychology , philosophy , linguistics , epistemology , psychiatry , politics , political science , law
We use a one‐factor two‐sector model of comparative advantage with uncertainty to compare the effects of different specialization levels on growth under various scenarios. We derive the static and dynamic optimal level of specialization under the centralized and the decentralized economy. We identify the conditions under which the socially optimal specialization level entails positive investment in the comparatively disadvantaged sector. We show that in this case the socially optimal solution cannot be reached by the decentralized economy which is in fact characterized by over‐specialization . We conclude presenting a simple tax‐based redistributive mechanism able to achieve the optimal level of specialization in a decentralized economic system.