money and capital abstract the effects of money anticipated inflation on capital formation is a classic issue in macroeconomics previous papers adopt reduced form approaches putting money in the utility function or imposing cash in advance but using otherwise frictionless models we follow instead a literature that tries to be explicit about the frictions making money essential this introduces new elements including a two sector structure with centralized and decentralized markets stochastic trading opportunities and bargaining these elements matter quantitatively and numerical results differ from findings in the reduced form literature the analysis also reduces a gap between microfounded monetary economics and mainstream macro

directed matching and monetary exchange we develop a model of monetary exchange where as in the random matching literature agents trade bilaterally and not through centralized markets rather than assuming they match exogenously and at random however we determine who meets whom as part of the equilibrium we show how to formalize this process of directed matching in dynamic models with double coincidence problems and present several examples and applications that illustrate how the approach can be used in monetary theory some of our results are similar to those in the random matching literature others differ significantly

premuneration values and investments in matching markets we analyze a model in which agents make investments and then match into pairs to create a surplus the agents can make transfers to reallocate their pretransfer ownership claims on the surplus mailath postlewaite and samuelson 2013 showed that when investments are unobservable equilibrium investments are generally inecient in this paper we work with a more structured model that is suciently tractable to analyze the nature of the investment ineciencies we provide conditions under which investment is ineciently high or low and conditions under which changes in the pretransfer ownership claims on the surplus will be pareto improving as well as examine how the degree of heterogeneity on either side of the market aects investment eciency

incomplete wage posting we consider a directed search model in which workers differ in productivity productivity becomes observable to firms after assessing their workers on the job but it is not verifiable firms with vacancies choose between posting a noncontingent wage and leaving wages subject to bargaining with the worker under wage bargaining firms cannot optimize the trade off between paying higher wages and having a larger probability of filling vacancies but wage bargaining makes wages increasing in worker productivity and so may allow firms to attract better workers into the vacancy when workers heterogeneity is large and bargaining powers come close to satisfying hosios s rule firms opt for bargaining yet equilibria with bargaining fail to maximize aggregate net income and sometimes are not constrained pareto optimal

efficient non contractible investments in large economies abstract do investors making complementary investments face the correct incentives especially when they cannot contract with each other prior to their decisions we present a two sided matching model in which buyers and sellers make investments prior to matching once matched buyer and seller bargain over the price taking into account outside options efficient decisions can always be sustained in equilibrium we characterize the inefficiencies that can arise in equilibrium and show that equilibria will be constrained efficient we also show that the degree of diversity in a large market has implications for the extent of any inefficiency journal of economic literature classification numbers c78 d41 d51

dynamic inefficiency in decentralized capital markets abstract we study the efficiency implications of bargaining in frictional capital markets in which firms match bilaterally with dealers in order to buy or sell capital we show how two of the distinguishing characteristics of capital ownership and the intertemporal nature of investment give rise to a dynamic inefficiency firms that anticipate buying capital in the future overinvest because this increases their outside option of no trade in negotiations with dealers in the future thereby lowering the bargained purchase price vice versa firms that anticipate selling capital in the future strategically underinvest because this increases the bargained sale price if the only motive for trade is capital depreciation there is overinvestment with stochastic productivity high productivity firms underinvest and low productivity firms overinvest in equilibrium the inefficiency interacts with the externality from dealer entry and implies that no bargaining power achieves the constrained efficient allocation we propose a regressive tax on capital that can restore efficiency finally we calibrate the model to data on physical capital markets and show that depending on bargaining power the welfare loss from the inefficiency can be large

equilibrium incentive contracts and efficiency wages we analyze the optimal efficiency wage contract when output is contractible but firms neither observe the workers effort nor their match specific productivity firms offer wage contracts that optimally trade off effort and wage costs as a result employed workers enjoy rents which in turn creates unemployment nonetheless the incentive power of the equilibrium wage contract is constrained efficient in the absence of taxes and unemployment benefits we also show that more high powered incentive contracts tend to be associated with higher equilibrium unemployment rates jel e24 j30 j41

the macroeconomic consequences of raising the minimum wage capital accumulation employment and the wage distribution we study the quantitative impact of a rise in the minimum wage on macroeconomic outcomes such as employment the stock of capital and the distribution of wages our modeling framework is the large firm search and matching model our comparative statics are in line with previous empirical findings a moderate increase in the minimum wage barely affects employment while it compresses the wage distribution and generates positive spillovers on higher wages the model also predicts an increase in the stock of capital next we perform the policy experiment of introducing a 10 dollar minimum wage our results suggest large positive effects on capital 4 0 and output 1 8 with a decrease in employment by 2 8 the introduction of a 9 dollar minimum wage would instead produce similar effects on capital accumulation without harming employment

knowledge accumulation within an organization in this article we consider a knowledge accumulation problem within an organization that cannot prevent the worker from quitting and using the knowledge outside the organization we show that knowledge accumulation is delayed the fraction of working time allocated to knowledge creation is highest at the early career stage falls gradually then rises again before falling finally toward zero we determine the effect of a change in the severity of the enforcement problem or the specificity of knowledge we also discuss the form of the optimal life cycle wage profiles the role of the initial knowledge level and the role of discounting

how does the stock market absorb shocks abstract using a comprehensive set of news stories we find a stark difference in market responses to positive and negative price shocks accompanied by new information when there is a news story about a firm positive price shocks are followed by reversal while negative ones result in drift this is interpreted as the stock market overreaction to good news and underreaction to bad news these seemingly contradictory results can be explained in a single framework considering the interaction of retail investors with attention bias and arbitrageurs with short run capital constraints consistent with this hypothesis we find that both patterns are stronger when the attention bias is stronger and when the arbitrage capital is scarce

wage and technology dispersion this paper explains why firms with identical opportunities may use different technologies and offer different wages our key assumption is that workers must engage in costly search in order to gather information about jobs stigler 1961 in equilibrium some firms adopt high fixed cost high productivity technologies offer high wages and fill job openings quickly other firms adopt less capital intensive technologies and offer low wages hiring mostly uninformed workers in equilibrium the amount of wage dispersion leaves workers indifferent about whether to gather information and the fraction of informed workers leaves firms indifferent about their wage and technology choice we show that worker search which would appear to be a rent seeking activity in partial equilibrium may be efficiency enhancing in general equilibrium

labour im mobility and monopsonistic exploitation of workers in the urban informal sector lessons from a field study it is well recognised in labour economics that employers in monopsonistic competition have market power to set wages below the productivity of workers if workers are immobile which causes monopsonistic exploitation of workers monopsonistic exploitation is propelled by employers expectations about the degree of im mobility of workers and therefore by ex post mobility of workers it hence begs a question of what determines the relative im mobility of informal workers which has significant implications for monopsonistic exploitation and working poverty in the urban informal sector from our field study of urban and peri urban labour markets in bangladesh by modifying the method of stochastic frontier analysis we explain the behavioural foundation to the relative im mobility of informal workers we thereby unravel the effects of individual and household characteristics sociological institutional factors and household ties including worker s kinship on the relative immobility of a worker that can in turn explain monopsonistic exploitation and working poverty widely prevalent in the urban informal sector of south asia

new microfoundations for the aggregate matching function empirical studies of the aggregate labor market matching function have favored a cobb douglas functional form for which there are no microfoundations in the existing literature i present a new model for the matching process based on a telephone line poisson queuing process which unlike other microeconomic approaches can be integrated directly into standard theoretical search models this implies a ces matching function approximately cobb douglas when search costs are approximately linear the model allows empirical estimates of matching function parameters to be interpreted in terms of the costs and benefits of search

daron acemoglu 2005 john bates clark medalist daron acemoglu winner of the 2005 john bates clark medal uses theoretical and empirical analysis to tackle critical issues in a variety of fields in economics including labor economics macroeconomics and political economy his unparalleled combination of originality thoroughness and prolificacy has propelled him to the frontier of each field that he has explored the clark medal committee notes that his work is always motivated by real world questions that arise when facts are difficult to reconcile with existing theory daron focuses on a core set of questions and uses the best tools available to answer them what determines the accumulation of human capital both during formal schooling and on the job how do the implications of labor market frictions depend on the information available to job searchers how do economic incentives affect the type of technological change that we observe why are there such enormous differences in output per worker and total factor productivity across countries

welfare cost of fluctuations when labor market search interacts with financial frictions we provide a quantitative assessment of welfare costs of fluctuations in a search model with financial frictions the matching process in the labor market leads positive shocks to reduce unemployment less than negative shocks increase it we show that the magnitude of this non linearity is magnified frictions this asymmetric effect of the business cycle leads to sizable welfare costs the model also accounts for the responsiveness of the job finding rate to the business cycle as financial frictions endogenously generate counter cyclical opportunity costs of opening a vacancy and wage sluggishness

renegotiation and symmetry in repeated games abstract the paper derives a theory of renegotiation proofness in symmetric repeated games based on a notion of equal bargaining power according to consistent bargaining equilibrium a player can mount a credible objection to a continuation equilibrium in which he receives a particular expected present discounted value if there are other self enforcing agreements that never give any player such a low continuation value after any history the definition does not imply strongly symmetric solutions but under modest assumptions consistent bargaining equilibria of infinitely repeated games with perfect monitoring are strongly symmetric such solutions have an unusually elementary characterization journal of economic literature classification numbers c7 c72

dynamic contracts with worker mobility via directed on the job search this article proposes a model with dynamic incentive contracts and on the job search in a frictional labor market the optimal long term contract exhibits an increasing wage tenure profile with increasing wages worker effort also increases with tenure these two features imply that the probabilities of both voluntary and involuntary job separation decrease with both job tenure and the duration of employment given these results workers experience differing labor market transitions between employment unemployment and across different employers and the equilibrium generates endogenous heterogeneity among ex ante homogeneous workers abstract from author

estimating the stock flow matching model using micro data we estimate the stock flow matching model using micro level data from a well defined labor market using a dataset of complete labor market histories for both sides of the market we estimate hazard functions for job seekers and vacancies we find that the stock of new vacancies has a significant positive impact on the job seeker hazard over and above that of the total stock of vacancies there is an even stronger robust result for vacancy hazards thus we find evidence in favor of stock flow matching even when controlling for unobserved search heterogeneity and stratifying into submarkets defined by location and occupation

subjective performance measures in optimal incentive contracts objective measures of performance are seldom perfect in response incentive contracts often include important subjective components that mitigate incentive distortions caused by imperfect objective measures this paper explores the combined use of subjective and objective performance measures in respectively implicit and explicit incentive contracts naturally objective and subjective measures often are substitutes sometimes strikingly so we show that if objective measures are sufficiently close to perfect then no implicit contracts are feasible because the firm s fallback position after reneging on an implicit contract is too attractive we also show however that objective and subjective measures can reinforce each other if objective measures become more accurate then in some circumstances the optimal contract puts more weight on subjective measures because the improved objective measures increase the value of the ongoing relationship and so reduce the firm s incentive to renege we also analyze the use of subjective weights on objective performance measures and provide case study evidence consistent with our analyses

wage posting evidence from job ads recent studies of search theory examine how employers use a wage setting mechanism either by bargaining or through the posting of a non negotiable wage offer in a job ad to facilitate search we contribute to this literature by examining wage posting in job ads in the us the uk and slovenia despite considerable differences in the incidence of wage posting employers in all three markets are less likely to post a wage offer when searching for skilled workers the decision on whether or not to post a wage offer is only weakly related to the outcomes of employers search des etudes recentes de la theorie de la recherche d employes examinent comment les employeurs utilisent le mecanisme de determination des salaires soit par marchandage soit en mentionnant une offre de salaire non negociable dans l annonce de l offre d emploi pour faciliter le processus de recherche on examine les salaires mentionnes dans les annonces d offre d emplois aux etats unis au royaume uni et en slovenie malgre des differences considerables dans l incidence de l annonce du salaire les employeurs dans ces trois marches sont moins susceptibles d annoncer un salaire quand ils cherchent des travailleurs qualifies la decision d annoncer un salaire ou non est seulement faiblement reliee aux resultats de la recherche des employeurs

sorting and decentralized price competition we investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents there are two aspects of value creation the match value when two agents actually trade and the probability of trading governed by the search technology we show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter this happens if and only if the match value function is root supermodular that is its nth root is supermodular where n reflects the elasticity of substitution of the search technology this condition is weaker than the condition required for positive assortative matching in markets with random search

directed search for equilibrium wage tenure contracts i analyze the equilibrium in a labor market where firms offer wage tenure contracts to direct the search of employed and unemployed workers each applicant observes all offers and there is no coordination among individuals workers applications as well as firms recruiting decisions are optimal this optimality requires the equilibrium to be formulated differently from the that in the literature of undirected search i provide such a formulation and show that the equilibrium exists in the equilibrium individuals explicitly tradeoff between an offer and the matching rate at that offer this tradeoff yields a unique offer which is optimal for each worker to apply and applicants are separated endogenously according to their current values despite such uniqueness and separation there is a non degenerate and continuous wage distribution of employed workers in the stationary equilibrium the density of this distribution is increasing at low wages and decreasing at high wages in all equilibrium contracts wages increase with tenure which results in quit rates to decrease with tenure moreover the model makes novel predictions about individuals job to job transition and comparative statics

marriage specialization and the gender division of labor we consider why the gender division of labor is so often enforced by custom and why customary gender divisions of labor generally involve both direction and prohibition in our formal model agents first learn skills and then enter the marriage market we show that wasteful behavior may emerge due to strategic incentives in specialization choice and human capital acquisition and that both problems may be mitigated through a customary gender division of labor this division is not pareto improving both the distributional effects and welfare gains of a customary gender division of labor decrease as opportunities for market exchange increase

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

renegotiation and conflict resolution in relational contracting abstract renegotiation and conflict resolution are studied in relational contracting under subjective evaluation renegotiation has three effects first it makes the incentive pay scheme low powered the maximum variation of compensation across performance levels is compressed and the contract is less extreme compared to the case without renegotiation this effect is stronger when the players are less patient second renegotiation typically renders termination impossible the contract relies on a low morale mechanism to enforce mutual cooperation finally renegotiation compels the players to resolve their conflicts by selecting a contract that maximizes the lowest possible surplus along the path of the contract

the interaction of implicit and explicit contracts in repeated agency abstract in a repeated principal agent model in which the agent s actions are observable to the principal but not verifiable in court the agent s incentives derive both from salary payments based on verifiable signals and from implicit promises by the principal of bonuses for good behavior explicit short term contracts are designed to enhance the effectiveness of the infinite horizon implicit contract between principal and agent in a constrained efficient equilibrium bonuses smooth the consumption path of the risk averse agent by moving in the opposite direction from salaries total consumption and expected discounted utility for the rest of the game journal of economic literature classification numbers c7 c73 d8

robust comparative statics in large dynamic economies we consider infinite horizon economies populated by a continuum of agents subject to idiosyncratic shocks this framework contains models of saving and capital accumulation with incomplete markets in the spirit of works by bewley aiyagari and huggett models of entry exit and industry dynamics in the spirit of hopenhayn s work and dynamic models of occupational choice and search models as special cases robust and easy to apply comparative statics results are established with respect to exogenous parameters as well as various kinds of changes in the markov processes governing the law of motion of the idiosyncratic shocks

contracting with repeated moral hazard and private evaluations a repeated moral hazard setting in which the principal privately observes the agent s output is studied the optimal contract for a finite horizon is characterized and shown to require burning of resources these are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor for the infinite horizon it is shown that there is no loss from restricting the analysis to contracts in which the agent receives a constant efficiency wage and no feedback until he is fired furthermore optimal contracts cannot be replicated by short term contracts a family of fixed interval review contracts is characterized longer review intervals are preferable but harder to implement comparative statics on the review length are carried out finally these contracts are shown approximate first best if players are very patient jel d82 d86

relational incentive contracts standard incentive theory models provide a rich framework for studying informational problems but assume that contracts can be perfectly enforced this paper studies the design of self enforced relational contracts i show that optimal contracts often can take a simple stationary form but that self enforcement restricts promised compensation and affects incentive provision with hidden information it may be optimal for an agent to supply the same inefficient effort regardless of cost conditions with moral hazard optimal contracts involve just two levels of compensation this is true even if performance measures are subjective in which case optimal contracts terminate following poor performance jel c73 d82 l14

holdups and overinvestment in capital markets abstract this paper considers a decentralized capital market characterized by trading frictions in which firms and suppliers need to make investment decisions before meeting with each other and bargaining over the price of capital the resulting holdup problem provides firms with a strategic incentive to overaccumulate capital so as to reduce their marginal productivity and thus the bargained price in equilibrium this strategic incentive can outweigh the usual distortionary effects of holdup problems that on their own would lead to underinvestment thus resulting in the economy to overinvest in a setting with both capital and labor the holdup problem in capital markets interacts with holdup problems in labor markets this presents firms with a trade off that has non trivial equilibrium effects and that depending on the substitutability of capital and labor and the firm s bargaining power in each market can mitigate or exacerbate the overinvestment result

money in search equilibrium in competitive equilibrium and in competitive search equilibrium we compare three market structures for monetary economies bargaining search equilibrium price taking competitive equilibrium and price posting competitive search equilibrium we also extend work on the microfoundations of money by allowing a general matching technology and entry we study how equilibrium and the effects of policy depend on market structure under bargaining trade and entry are both inefficient and inflation implies first order welfare losses under price taking the friedman rule solves the first inefficiency but not the second and inflation may actually improve welfare under posting the friedman rule yields the first best and inflation implies second order welfare losses

competitive search markets with heterogeneous workers abstract this paper extends the concept of competitive search markets to the case with heterogeneous workers if offers can condition on workers productivity as this depends on some formal qualification the equilibrium is separating and efficient though there is wage compression if offers cannot condition on workers productivity the nature of the equilibrium depends on the size of the workers productivity difference for intermediate values of the productivity difference separation is achieved only by paying high types an efficiency wage premium we discuss several implications for wage dispersion and efficiency

productive low morale abstract this paper models employment relationship as a repeated principal agent problem with private evaluation the efficient contracts exhibit correlated movements between lagged wage and current effort that are consistent with the positive feedback between pay and morale in practice low morale therefore is an integral part of a well functioning relationship

sorting through search and matching models in economics toward understanding assortative matching this is a self contained introduction to research on search and matching we first explore the nontransferable and perfectly transferable utility matching paradigms and then a unifying imperfectly transferable utility matching model motivated by some unrealistic predictions of frictionless matching we flesh out the foundational economics of search theory we then revisit the original matching paradigms with search frictions we finally allow informational frictions that often arise such as in college student sorting

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

frictional assignment i efficiency abstract this paper examines the two sided matching problem where the agents on each side of the market are heterogeneous and the matching process is time consuming this is cast in a labor market setting where workers of different skills match with different machine qualities i characterize the efficient allocation and then show that it can be decentralized by a market mechanism the efficient assignment is not always positively assortative despite the fact that machine qualities and skills are complementary in production to decentralize the efficient allocation the market mechanism requires the firms to post wages and commit each machine quality to a particular skill implications on wage inequality are briefly examined journal of economic literature classification numbers j31 e24 j64

bidding for money we analyze monetary exchange in a model that allows for directed search and multilateral matches we consider environments with divisible goods and indivisible money and compare the results with those in models that use random matching and bilateral bargaining two different pricing mechanisms are used ex ante price posting and ex post bidding auctions also we consider settings both with and without lotteries we find that the model generates very simple and intuitive equilibrium allocations that are similar to those with random matching and bargaining but with different comparative static and welfare properties

coordination matching and wages we analyse the coordination problem in the labour market by endogenizing the matching function and the wage share each firm posts a wage to maximize the expected profit anticipating how the wage affects the expected number of applicants in equilibrium workers apply to firms with mixed strategies which generate coordination failure and persistent unemployment we show how the wage share unemployment and the welfare loss from the coordination failure depend on the market tightness and the market size the welfare loss from the coordination failure is as high as 7 5 per cent of potential output jel classification c78 j64 les auteurs analysent le probleme de la coordination dans le marche du travail en endogeneisant la fonction arrimage et la part des revenus qui va aux salaires chaque entreprise definit le niveau de salaire qui maximise ses profits anticipes en tenant compte de l effet de ce niveau de salaire sur le nombre des applications qu elle peut anticiper de meme les travailleurs font application aupres d une entreprise a un salaire donne en tenant compte d une certaine relation d equivalence entre niveau de salaire et probabilite d obtenir l emploi voila qui engendre incoordination et chomage persistant on montre que la part des revenus qui revient aux salaires le niveau de chomage et les pertes de bien etre attribuables au manque de coordination dependent de la taille du marche et du degre de rarete de la main d oeuvre les pertes de bien etre attribuables au manque de coordination correspondent a quelques 7 5 pour cent de la production potentielle

competition human capital and income inequality with limited commitment we develop a dynamic general equilibrium model with two sided limited commitment to study how barriers to competition such as re strictions to business start up aect the incentive to accumulate hu man capital we show that a lack of contract enforceability ampli es the eect of barriers to competition on human capital accumulation high barriers reduce the incentive to accumulate human capital by lowering the outside value of skilled workers while low barriers can result in over accumulation of human capital this over accumulation can be socially optimal if there are positive knowledge spillovers a calibration exercise shows that this mechanism can account for signif icant cross country income inequality

city structure search and workers job acceptance behavior abstract this paper develops a stochastic search model having a monocentric city structure and investigates how city structure affects workers job acceptance behavior and a labor market in the model workers reside in a city and commute to the central business district cbd to work when employed and to be interviewed when unemployed when a job searcher contacts a firm having a vacant job he she observes the level of training costs necessary for employment and decides whether to accept the job it is shown that there exists a unique market equilibrium in which the employed live close to the cbd and the unemployed reside far away from the cbd analysis shows that 1 improvement of commuting technology induces job searchers to accept more costly jobs and lowers the unemployment rate in the city 2 growth of the city makes job searchers less tolerant of training and raises the unemployment rate and 3 as job searchers search more intensively they become choosier if commuting costs are sufficiently small efficiency properties of the equilibrium are also explored

investment horizon and repo in the over the counter market this paper presents a three period model featuring a short term investor in the over the counter bond market a short term investor stores cash because of a need to pay cash at some future date if a short term investor buys bonds then a deadline for retrieving cash lowers the resale price of bonds for the investor through bilateral bargaining in the bond market ex ante this hold up problem explains the use of a repo by a short term investor the existence of a haircut and the vulnerability of a repo market to counterparty risk this result holds without any uncertainty about bond returns or asymmetric information

directed search on the job and the wage ladder we model a labor market where employed workers search on the job and firms direct workers search using wage offers and employment probabilities applicants observe all offers and face a trade off between wage and employment probability there is wage dispersion among workers even though all workers and jobs are homogeneous equilibrium wages form a ladder as workers optimally choose to climb the ladder one rung at a time this is because low wage applicants are relatively more sensitive to employment probability than to wage and thus forgo the opportunity to apply for a high wage with a lower chance of success

competitive equilibrium with search frictions a general equilibrium approach abstract when the trading process is characterized by search frictions traders may be rationed so markets need not clear we build a general equilibrium model with transferable utility where the uncertainty arising from rationing is incorporated in the definition of a commodity in the spirit of the arrow debreu theory prices of commodities then depend not only on their physical characteristics but also on the probability that their trade is rationed the standard definition of competitive equilibrium is extended by replacing the market clearing condition with an exogenous matching function which describes a trading technology that is not frictionless as is typical in search models the matching function relates the rationing probabilities of buyers and sellers to the ratio of buyers to sellers in the market when search frictions vanish our model is equivalent to the continuous assignment model of gretsky et al 20 we adapt their approach which uses linear programming techniques and duality theory to show that a competitive equilibrium exists and is constrained efficient in our environment our competitive equilibrium notion is equivalent to that of directed or competitive search the strength of our formulation and the linear programming approach is that they allow us to generalize the constrained efficiency and existence results in the directed search literature to a much broader class of economies our framework also opens the door to the use of existing algorithms for computing equilibria and taking these models to the data

optimal contracting with subjective evaluation this paper extends the standard principal agent model to allow for subjective evaluation the optimal contract results in more compressed pay relative to the case with verifiable performance measures moreover discrimination against an individual implies lower pay and performance suggesting that the extent of discrimination as measured after controlling for performance may underestimate the level of true discrimination finally the optimal contract entails the use of bonus pay rather than the threat of dismissal hence neither efficiency wages nor the right to dismiss an employee are necessary ingredients for an optimal incentive contract

holdups and efficiency with search frictions a natural holdup problem arises in a market with search frictions firms have to make a range of investments before finding their employees and larger investments translate into higher wages in particular when wages are determined by ex post bargaining the equilibrium is always inefficient recognizing that capital intensive production relations have to pay higher wages firms reduce their investments this can only be prevented by removing all the bargaining power from the workers but this in turn depresses wages below their social product and creates excessive entry of firms in contrast to this benchmark we show that efficiency is achieved when firms post wages and workers can direct their search toward more attractive offers this efficiency result generalizes to an environment with imperfect information where workers only observe a few of the equilibrium wage offers we show that the underlying reason for efficiency is not wage posting per se but the ability of workers to direct their search toward more capital intensive jobs

commitment advertising and efficiency of two sided investment in competitive search equilibrium abstract competitive search entails both commitment to and advertising of pay off relevant aspects of market participants this paper considers incrementally the implications of each in a labor market where both workers and firms invest prior to market entry a wide range of institutional arrangements are addressed within the same general framework when the characteristics of jobs or workers are advertised the efficient outcome pertains commitment without advertising typically leads to market unravelling the diamond paradox but whenever wages and human capital are advertised firms become residual claimants the private and social returns to investment coincide absent wage commitment the hosios condition implies efficiency when investments are advertised

competitive pricing and efficiency in search equilibrium we consolidate and generalize some results on price determination and efficiency in search equilibrium extending models by rubinstein and wolinsky and by gale heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition when the discount rate r and search costs converge to 0 we show that prices in all exchanges are the same and equal the competitive market clearing price given positive search costs efficiency obtains iff bargaining satisfies hosios condition and r 0 when prices are set by third party market makers however we show that search equilibrium is necessarily efficient

investment and competitive matching we study markets in which agents first make investments and are then matched into potentially productive partnerships equilibrium investments and the equilibrium matching will be efficient if agents can simultaneously negotiate investments and matches but we focus on markets in which agents must first sink their investments before matching additional equilibria may arise in this sunk investment setting even though our matching market is competitive these equilibria exhibit inefficiencies that we can interpret as coordination failures all allocations satisfying a constrained efficiency property are equilibria and the converse holds if preferences satisfy a separability condition we identify sufficient conditions most notably quasiconcave utilities for the investments of matched agents to satisfy an exchange efficiency property as well as sufficient conditions most notably a single crossing property for agents to be matched positive assortatively with these conditions then forming the core of sufficient conditions for the efficiency of equilibrium allocations

introduction to repeated games with private monitoring abstract we present a brief overview of recent developments in discounted repeated games with imperfect private monitoring the literature explores the possibility of cooperation in a long term relationship where each agent receives imperfect private information about the opponents actions although this class of games admits a wide range of applications such as collusion under secret price cutting exchange of goods with uncertain quality and observation errors it has fairly complex mathematical structure due to the lack of common information shared by players this is in sharp contrast to the well explored case of repeated games under public information with the celebrated folk theorems and until recently little had been known about the private monitoring case however rapid developments in the past few years have revealed the possibility of cooperation under private monitoring for some class of games journal of economic literature classification numbers c72 c73 d43 d82 l13 l41

sunk capital unions and the hold up problem theory and evidence from cross country sectoral data abstract in this paper we study the hold up problem by considering the effect of union bargaining power on the level of investment per worker across sectors characterised by different levels of sunk capital investment we develop a search and matching model with heterogeneous sectors and ex post collective wage bargaining and test the predictions of the model using a difference in difference approach on manufacturing sector data in a set of oecd countries during the period 1980 2000 we find that union power reduces investment per worker particularly in sunk capital intensive industries we refine our empirical analysis showing that the underlying hold up problem is exacerbated when strikes are not regulated after a collective contract is signed and there is no arbitration while the presence of social pacts may sustain cooperative equilibria that alleviate the hold up problem our results are robust to a series of controls and possible endogeneity of union power

too much investment a problem of endogenous outside options this paper shows that when agents on both sides of the market are heterogeneous varying in their costs of investment ex ante investments by firms and workers or buyers and sellers more generally may be too high when followed by stochastic matching and bargaining over quasi rents the overinvestment is caused by the fact that low cost agents by investing more can increase the value of their outside option and thus shift rent away from high cost investors numerical simulations show that overinvestment can occur given parameter values calibrated to oecd labour markets

inflation and unemployment in the long run we study the long run relation between money measured by inflation or interest rates and unemployment we first document in the data a positive relation between these variables at low frequencies we then develop a framework where unemployment and money are both modeled using microfoundations based on search and bargaining theory providing a unified theory for analyzing labor and goods markets the calibrated model shows that money can account for a sizable fraction of trends in unemployment we argue it matters qualitativelynand quantitatively whether one uses monetary theory based on search and bargaining or an alternative ad hoc specification

bargaining reputation and equilibrium selection in repeated games with contracts consider a two person intertemporal bargaining problem in which players choose actions and offers each period and collect payoffs as a function of that period s actions while bargaining proceeds this can alternatively be viewed as an infinitely repeated game wherein players can offer one another enforceable contracts that govern play for the rest of the game theory is silent with regard to how the surplus is likely to be split because a folk theorem applies perturbing such a game with a rich set of behavioral types for each player yields a specific asymptotic prediction for how the surplus will be divided as the perturbation probabilities approach zero behavioral types may follow nonstationary strategies and respond to the opponent s play in equilibrium rational players initially choose a behavioral type to imitate and a war of attrition ensues how much should a player try to get and how should she behave while waiting for the resolution of bargaining in both respects she should build her strategy around the advice given by the nash bargaining with threats nbwt theory developed for two stage games in any perfect bayesian equilibrium she can guarantee herself virtually her nbwt payoff by imitating a behavioral type with the following simple strategy in every period ask for and accept nothing less than that player s nbwt share and while waiting for the other side to concede take the action nash recommends as a threat in his two stage game the results suggest that there are forces at work in some dynamic games that favor certain payoffs over all others this is in stark contrast to the classic folk theorems to the further folk theorems established for repeated games with two sided reputational perturbations and to the permissive results obtained in the literature on bargaining with payoffs as you go

wage tenure contracts with heterogeneous firms abstract this paper investigates equilibria where firms post wage tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed we generalize previous work by assuming firms have different productivities equilibrium implies more productive firms always offer more desirable contracts thus workers never quit from more productive firms for less productive firms nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms a worker who quits to a more productive firm may accept a wage cut such wage cuts are compensated by faster promotion rates to higher wage levels in the future we also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage tenure contracts need not be smooth

directed search and optimal production abstract i consider a model of directed search where strategic sellers advertise general trading mechanisms a mechanism determines the number of buyers that will get served and the side payments as a function of ex post realized demand buyers observe these advertisements and visit one seller without being able to coordinate their visiting strategies despite the oligopolistic nature of the model all symmetric equilibria are constrained efficient in small markets multiple equilibria exist that are not payoff equivalent this indeterminacy vanishes as the market grows large i provide closed form solutions for equilibrium prices profits and the matching function under any parameter values

competitive search equilibrium with multidimensional heterogeneity and two sided ex ante investments abstract we analyze a competitive price taking search model where workers and firms make costly investments e g in education and physical capital respectively before they enter the labor market the environment features transferable utility and symmetric information a key novelty with respect to existing work is that we allow for multidimensional heterogeneity on both sides of the market the probabilities of finding and filling different jobs and the corresponding wages are determined endogenously in equilibrium we show that constrained efficient allocations can be determined as optimal solutions to a linear programming problem whereas the prices supporting these allocations and the associated expected payoffs for workers and firms correspond to the solutions of the dual of that linear program we use this characterization to show that an equilibrium exists and is constrained efficient under very general conditions the fact that linear programming techniques are used for the structural estimation of frictionless matching models suggests that our framework is potentially useful for empirical studies of labor markets and other markets where search frictions are prevalent

applications and interviews firms recruiting decisions in a frictional labour market i develop a directed search model to study the recruitment decisions of firms competing for workers who ex post differ in two dimensions 1 their match productivity and 2 their probability of accepting a job offer endogenously determined by their choice of application portfolio to attract these workers firms post a recruiting intensity and a hiring standard in addition to terms of trade a higher recruiting intensity is costly but allows the firm to select more applicants for an interview which reveals their productivity the hiring standard solves the tradeoff between immediate hiring and waiting for a potentially better match in the future i characterize equilibrium and find that various outcomes including uniqueness of equilibrium and the cyclicality of recruiting intensity crucially depend on firms recruiting cost and workers search cost calibration of the model to the u s labour market indicates a continuum of equilibria given selection of a particular equilibrium hiring standards are countercyclical while recruiting intensity is procyclical the calibrated model creates more amplification than a standard model without intensive margins and gives rise to procyclical match efficiency when viewed through the lens of a cobb douglas matching function

wage differentials discrimination and efficiency abstract i analyze a large labor market where homogeneous firms post wages to direct the search of workers who differ in productivity i show that the model has a unique equilibrium the wage differential depends positively on the workers productivity differential only when the latter is large when the productivity differential is small high productivity workers get a lower wage than low productivity workers this reverse wage differential remains even when the productivity differential shrinks to zero however the equilibrium is socially efficient high productivity workers always get the employment priority and higher expected wages than low productivity workers although discrimination in terms of expected wages does not exist conventional measures are likely to incorrectly find discrimination in the model

labor market search and schooling investment we generalize a search matching and bargaining model to allow individuals to acquire productivity enhancing schooling prior to labor market entry in general search frictions and weakness in bargaining position contribute to underinvestment in schooling from an efficiency perspective using estimates of a general equilibrium version of the model in which firm vacancy creation decisions are included we find that minimum wages and schooling subsidies improve aggregate welfare but have very different welfare impacts across the ability distribution in particular policies that maximize the average welfare of workers have strongly negative effects on the welfare of the least able

adaptability productivity and educational incentives in a matching model abstract we study the connections between the labour market and the education sector in a matching framework with ex post wage bargaining workers have multidimensional skills and the search market is segmented by technology education is a time consuming activity and determines jointly the scope or adaptability and intensity or productivity of individual skills we establish three main results first unemployment provides incentives to schooling by raising the need for adaptability second private returns to productivity are below social returns but no hold up phenomenon is involved third due to wage and congestion externalities private returns to adaptability exceed social returns as a consequence both over and under education may take place in equilibrium

labor market equilibrium with rehiring consistent with the empirical evidence this article analyzes a labor market in which separations are not permanent and reactivated firms prefer to rehire former employees instead of seek new ones workers engage in job search due to the uncertain prospects of rehiring if firms can commit to wages contingent on rehiring they backload wages to provide incentives for workers to reduce their unobservable search effort under risk aversion and incomplete markets if productivity at reactivation is sufficiently high the tension between wage backloading and consumption smoothing leads to excessive search in equilibrium

the economics of new blood abstract we construct a dynamic general equilibrium model of search and matching where public knowledge grows through time and workers accumulate a fraction of this knowledge through education retraining due to search delays the unemployment pool is populated by vintages of workers of differing productivities through intergenerational rivalry the human capital of older generations is rendered obsolete relative to that of the new blood higher knowledge growth exacerbates intergenerational competition thereby lowering education and growth while raising unemployment and inequality these findings help explain wage compression expansion and the hump shaped wage tenure profile across cohorts

does competition solve the hold up problem in an environment in which heterogeneous buyers and sellers undertake ex ante investments the presence of market competition for matches provides incentives for investment but may leave inefficiencies namely hold up and coordination problems this paper shows using an explicitly non cooperative model that when matching is assortative and investments precede market competition buyers investments are constrained efficient while sellers marginally underinvest with respect to what would be constrained efficient however the overall extent of this inefficiency may be large multiple equilibria may arise one equilibrium is characterized by efficient matches but there can be additional equilibria with coordination failures

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

constrained efficiency with adverse selection and directed search abstract this paper studies constrained efficiency in guerrieri et al s 2010 model of adverse selection and directed search buyers post contracts and sellers with private information about their type direct their search toward their preferred contract buyers and sellers then match bilaterally and trade if the guerrieri shimer wright equilibrium fails to achieve the first best then the planner subject to the frictions of the environment achieves strictly higher welfare than the equilibrium i e the equilibrium is not ex ante constrained efficient under certain conditions the planner achieves an allocation that even pareto dominates the equilibrium i e the equilibrium is not interim constrained efficient under other conditions the planner can completely undo the effects of adverse selection and achieves the first best cross subsidization is the key to these results

it s about time implications of the period length in an equilibrium search model empirical evidence suggests that transitions between employment states are highly clustered around the first day of each workweek or month i analyze the effect of this phenomenon by presenting an equilibrium search model in which the period length is a parameter determining the degree of clustering infinitesimally short periods result in a continuous time model with bilateral meetings whereas longer time periods introduce the possibility of recall or simultaneity of job offers in this environment i show that the period length has a profound effect on equilibrium outcomes including the unemployment rate unemployment duration and the cross sectional wage distribution

pricing and signaling with frictions abstract we study a market where each seller chooses the quality and price of goods and the number of selling sites observing sellers choices of prices and sites but not quality buyers choose which site to visit a seller s choices of prices can direct buyers search and signal quality a unique equilibrium exists and is separating when the quality differential is large the equilibrium implements the efficient allocation with public information otherwise the quality of goods and or the number of sites created is inefficient due to a conflict between the search directing and signaling roles of prices