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Market Power And Efficiency In A Search Model

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  • Manolis Galenianos
  • Philipp Kircher
  • Gábor Virág

Abstract

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the high to the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 52 (2011)
Issue (Month): 1 (02)
Pages: 85-103

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Handle: RePEc:ier:iecrev:v:52:y:2011:i:1:p:85-103

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References

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  1. Manolis Galenianos & Philipp Kircher, 2005. "Directed Search with Multiple Job Applications," PIER Working Paper Archive 05-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Manolis Galenianos & Philipp Kircher, 2007. "Heterogeneous Firms in a Finite Directed Search Economy," PIER Working Paper Archive 07-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  4. Philipp Kircher, 2009. "Efficiency of Simultaneous Search," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 861-913, October.
  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  6. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  7. Marja-Liisa Halko & Klaus Kultti & and Juha Virrankoski, 2008. "Search Direction And Wage Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 111-134, 02.
  8. Alan Manning, 2001. "Monopsony and the Efficiency of Labour Market Interventions," CEP Discussion Papers dp0514, Centre for Economic Performance, LSE.
  9. Ramon Marimon & Fabrizio Zilibotti, 1997. "Unemployment vs. mismatch of talents: Reconsidering unemployment benefits," Economics Working Papers 211, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
  11. James Albrecht & Pieter Gautier, 2004. "Equilibrium Directed Search with Multiple Applications," Econometric Society 2004 Latin American Meetings 330, Econometric Society.
  12. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
  13. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics.
  14. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
  15. L. Kaas & P. Madden, 2006. "Minimum Wages and Welfare in a Hotelling Duopsony," The School of Economics Discussion Paper Series 0604, Economics, The University of Manchester.
  16. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  17. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
  18. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  19. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
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Cited by:
  1. Jacquet, Nicolas L. & Tan, Serene, 2012. "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1064-1104.
  2. Jean Guillaume Forand, 2012. "Competing Through Information Provision," Working Papers 1201, University of Waterloo, Department of Economics, revised Apr 2012.

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