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Author Info
Joydeep Bhattacharya ()
Shankha Chakraborty ()

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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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File URL: http://hdl.handle.net/10.1007/s00199-004-0518-0
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Publisher 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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Related research
Keywords: Moral hazard; Costly state verification; Contracts; Dynamics; Growth models.;

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  34. Huang, Tzu-Ling & Hallam, J. Arne & Orazem, Peter F. & Paterno, Elizabeth, 1999. "Empirical Tests of Efficiency Wage Models," Staff General Research Papers 1325, Iowa State University, Department of Economics.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Patricia Crifo & Hind Sami, 2008. "Entrepreneurship, technological change and endogenous returns to ability," Post-Print hal-00243037_v1, HAL. [Downloadable!]
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