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What do information frictions do?

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  • Joydeep Bhattacharya

    ()

  • Shankha Chakraborty

    ()

Abstract

We present an overlapping generations model in which a labor market friction (moral hazard) coexists and interacts with a credit market friction (costly state verification). Our main results are: (i) while credit market frictions have long- and short-run real effects, labor market frictions typically have only short-run effects unless they also affect the volume of investment per worker, (ii) the frictions amplify each other to produce higher long-run unemployment than would result from only labor market frictions, (iii) these distortions may prolong the effect of temporary shocks, and (iv) the dynamics of economies with both frictions are qualitatively similar to their frictionless counterparts. Copyright Springer-Verlag Berlin/Heidelberg 2005

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 3 (October)
Pages: 651-675

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Handle: RePEc:spr:joecth:v:26:y:2005:i:3:p:651-675

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Keywords: Moral hazard; Costly state verification; Contracts; Dynamics; Growth models.;

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References

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Cited by:
  1. Patricia Crifo & Hind Sami, 2008. "Entrepreneurship, technological change and endogenous returns to ability," Post-Print hal-00243037, HAL.
  2. Agliari, Anna & Vachadze, George, 2014. "Credit market imperfection, labor supply complementarity, and output volatility," Economic Modelling, Elsevier, vol. 38(C), pages 45-56.

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