Directed Search without Wage Commitment and the Role of Labor Market Institutions

An urn-ball matching model of directed search is analyzed in which the usual assumption of commitment to posted wages is dropped. One-on-one matches lead to a Nash bargained wage but when multiple applicants arrive competition drives the workers down to their continuation value. A minimum wage can act as a commitment device when (as in the USA) willful underpayment carries a stiffer penalty than "inadvertetn underpayment. The theory sheds new light on why firms appear to voluntarily bind themselves into paying higher wages than they would otherwise pay. Robustness to various sources of heterogeneity is considered

Money in a Model of Prior Production and Imperfectly Directed Search

This paper considers the effect of monetary policy and inflation on retail markets. It analyzes a model in which: goods are dated and produced prior to being retailed, buyers direct their search on the basis of price and general quality and, buyers' match specific tastes are their private information. Sellers set the same price for all buyers but some do not value the good highly enough to purchase it. The market economy is typically inefficient as a social planner would have the good consumed. The Friedman rule represents optimal policy as long as there is free-entry of sellers. When the upper bound on the number of participating sellers binds sufficiently, moderate levels of inflation can be welfare improving.

Firm level hiring policy with culturally biased testing

This paper explores the implications for labor market outcomes of systematic testing of applicants in the hiring process. A matching model in which productivity is a worker's private information is used. Both wages and hiring rates are endogenous. A minority is defined as a group for whom the test is less precise in identifying individual productivity. Welfare and employment outcomes across various hiring policies are compared. Simulations suggest that tests are typically too accurate so that in a laissez faire economy minority group members fair better than the majority group members. Rules requiring equity in hiring reverse this result.

Re-entitlement Effects with Duration Dependent Unemployment Insurance in a Stochastic Matching Equilibrium

In the context of a standard equilibrium matching framework, this paper considers how a duration dependent unemployment insurance (UI) system affects the dynamics of unemployment and wages in an economy subject to stochastic job-destruction shocks. It establishes that re-entitlement effects induced by a finite duration UI program generate intertemporal transfers from firms that hire in future booms to firms that hire in current recessions. These transfers imply a net hiring subsidy in recessions which stabilizes unemployment levels over the cycleMatching frictions, Unemployment, Duration Dependent UI.

Middlemen in Search Equilibrium

This paper shows how including divisibility of goods and productive heterogeneity leads to the emergence of middlemen in an equilibrium search environment. In the baseline model, middlemen are welfare reducing and their number increases as market frictions are reduced. When the model is extended to allow for time taken in production and increasing returns-to-scale in the market meeting technology, middlemen can be beneficial to society by speeding up the meeting process.

Optimal Unemployment Insurance in a Matching Equilibrium

This paper considers the optimal design of unemployment insurance (UI) within an equilibrium matching framework when wages are determined by strategic bargaining. Unlike the Nash bargaining approach, reducing UI payments with duration is welfare increasing. A co-ordinated policy approach, however, one that chooses job creation subsidies and UI optimally, implies a much greater welfare gain than one which considers optimal UI alone. Once job creation subsidies are chosen optimally, the welfare value of making UI payments duration dependent is small.

Duration Dependent Unemployment Insurance and Stabilisation Policy

In the context of a standard equilibrium matching framework, this paper shows how a duration dependent unemployment insurance (UI) system stabilises unemployment levels over the business cycle. It establishes that re-entitlement effects induced by a finite duration UI program generate intertemporal tranfers from firms that hire in future booms to firms that hire in current recessions. These transfers imply a net hiring subsidy in recessions which stabilises unemployment levels over the cycle.

Ex-ante price commitment with renegotiation in a dynamic market

This paper studies a dynamic model of a market such as a labour market in which firms post wages and search for workers but trade may occur at a negotiated wage procedure in markets characterized by match-specific heterogeneity. We study a model of a market in which, in each time period, agents on one side (e.g., sellers) choose whether or not to post a price before they encounter agents of the opposite type. After a pair of agents have encountered each other, their match-specific values from trading with each other are realized. If a price was not posted, then the terms of trade (and whether or not it occurs) are determined by bargaining. Otherwise, depending upon the agents’ match-specific trading values, trade occurs (if it does) either on the posted price or at a renegotiated price. We analyze the symmetric Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a posted price rather than at a negotiated price

Endogenous Credit-card Acceptance in a Model of Precautionary Demand for Money

A credit-card acceptance decision by retailers is embedded into a simple model of precautionary demand for money. The model gives a new explanation for how the use of credit-cards can differ so widely across countries. Retailers' propensity to accept cards reduces the need for buyers to hold cash as the chance of a stock-out (of cash) is reduced. When retailers make their decision with respect to credit-card acceptance they do not take into account the effect that decision has on other sellers. This externality generates multiple equilibria over some portions of the parameter space.

Ex Ante Price Commitment with Renegotiation in a Dynamic Market

This paper studies the endogenous determination of the price formation procedure in markets characterized by matchspecific heterogeneity; such heterogeneity captures, for example, markets in which sellers own differentiated commodities and buyers have heterogeneous preferences. Specifically, we study a dynamic, stochastic model of a market in which, in each time period, agents on one side (e.g., sellers) strategically choose whether or not to “post”, or commit themselves to, incomplete price contracts before they encounter agents of the opposite type. After a pair of agents of the opposite types have encountered each other, their match-specific values from trading with each other are realised. If no price contract was posted, then the terms of trade (and whether or not it occurs) are determined by bilateral negotiations. Otherwise,depending upon the agents’ match-specific trading values and equilibrium continuation payoffs, trade occurs (if it does) either on the terms specified in the posted contract or at a renegotiated price (when renegotiation of the posted, incomplete price contract is mutually beneficial ). We study the Markov subgame perfect equilibria of this market game, and address a variety of issues such as the impact of market frictions on the equilibrium proportion of trades that occur at a price specified in the ex-ante posted contract rather than at a price determined by ex-post bargaining