SWITCHING COSTS AND SECTORAL ADJUSTMENTS IN GENERAL EQUILIBRIUM WITH UNINSURED RISK

Consider a two-sector economy subject to recurring technological shock s. These affect earnings in the two sectors differently, creating ince ntives for workers to switch occupation. Switching costs arc sunk. Ind ividuals are risk-averse and cannot diversify their income risk. We ch aracterize the rational expectations equilibrium of the economy and il lustrate the extent to which uncertainty and switching costs increase labor immobility. The resulting equilibrium is not even second-best op timal. Even a government that cannot transfer income to achieve insura nce can improve matters by speeding up the reallocation of labor acros s sectors, because that reduces relative price variability. (C) 1994 A cademic Press, Inc.