Uncertainty, Specialization and Government Intervention

Abstract

Abstract 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.

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