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Stochastic Search Equilibrium

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  • Giuseppe Moscarini
  • Fabien Postel-Vinay

Abstract

We study equilibrium wage and employment dynamics in a class of popular search models with wage posting, in the presence of aggregate productivity shocks. Firms offer and commit to (Markov) contracts, which specify a wage contingent on all payoff-relevant states, but must pay equally all of their workers, who have limited commitment and are free to quit at any time. We find sufficient conditions for the existence and uniqueness of a stochastic search equilibrium in such contracts, which is Rank Preserving [RP]: larger and more productive firms offer more generous contracts to their workers in all states of the world. On the RP equilibrium path, turnover is always efficient as workers always move from less to more productive firms. The resulting stochastic dynamics of firm size provide an intuitive explanation for the empirical finding that large employers have more cyclical job creation ( Moscarini and Postel-Vinay, 2012 ). Finally, computation of RP equilibrium contracts is tractable. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 80 (2013)
Issue (Month): 4 ()
Pages: 1545-1581

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Handle: RePEc:oup:restud:v:80:y:2013:i:4:p:1545-1581

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  1. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle," Working Papers, University of Toronto, Department of Economics tecipa-327, University of Toronto, Department of Economics.
  2. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage Bargaining with On-the-Job Search: Theory and Evidence," Econometrica, Econometric Society, Econometric Society, vol. 74(2), pages 323-364, 03.
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  7. Dey, M. S. & Flinn, C. J., 2000. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Working Papers, C.V. Starr Center for Applied Economics, New York University 00-18, C.V. Starr Center for Applied Economics, New York University.
  8. Margaret Stevens, 2004. "Wage-Tenure Contracts in a Frictional Labour Market: Firms' Strategies for Recruitment and Retention," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(2), pages 535-551, 04.
  9. Postel-Vinay & Robin, 2002. "Equilibrium wage dispersion with worker and employer heterogeneity," Working Papers, Institut National de la Recherche Agronomique, France 155908, Institut National de la Recherche Agronomique, France.
  10. Moscarini, Giuseppe & Postel-Vinay, Fabien, 2009. "Large Employers Are More Cyclically Sensitive," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7173, C.E.P.R. Discussion Papers.
  11. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
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  13. Carlos Carrillo-Tudela, 2009. "An Equilibrium Search Model When Firms Observe Workers' Employment Status," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 485-506, 05.
  14. Fabien Postel-Vinay & Giuseppe Moscarini, 2008. "The Timing of Labor Market Expansions: New Facts and a New Hypothesis," 2008 Meeting Papers, Society for Economic Dynamics 326, Society for Economic Dynamics.
  15. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "To Match or Not To Match ? Optimal Wage Policy with Endogenous Worker search Intensity," Working Papers, Centre de Recherche en Economie et Statistique 2002-59, Centre de Recherche en Economie et Statistique.
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  20. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
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  1. Stochastic Search Equilibrium
    by Christian Zimmermann in NEP-DGE blog on 2010-03-08 04:33:22
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