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Inefficient Unemployment Dynamics under Asymmetric Information

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  • Veronica Guerrieri

Abstract

I explore the efficiency properties of a competitive search model with match-specific private information and limited commitment on the workers' side. In a static setting the competitive search equilibrium is constrained efficient, whereas in a dynamic setting it is constrained inefficient whenever the initial unemployment rate is different from its steady-state level. Inefficiency arises because the workers' outside option becomes endogenous and affects the severity of the distortion due to the informational friction. This generates a novel externality: firms offering contracts at a given time do not internalize their effect on the outside option of workers hired in previous periods. (c) 2008 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 116 (2008)
Issue (Month): 4 (08)
Pages: 667-708

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Handle: RePEc:ucp:jpolec:v:116:y:2008:i:4:p:667-708

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Cited by:
  1. Cheremukhin, Anton A. & Tutino, Antonella & Restrepo-Echavarria, Paulina, 2014. "A theory of targeted search," Working Papers 1402, Federal Reserve Bank of Dallas.
  2. Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.
  3. Philipp Kircher & Leo Kaas, 2013. "Efficient firm dynamics in a frictional labor market," 2013 Meeting Papers 160, Society for Economic Dynamics.
  4. Alain Delacroix & Shouyong Shi, 2012. "Pricing and Signaling with Frictions," Working Papers tecipa-455, University of Toronto, Department of Economics.
  5. James Albrecht, 2013. "Efficient Entry in Competitive Search with Nonrival Meetings and Asymmetric Information," 2013 Meeting Papers 602, Society for Economic Dynamics.
  6. Adrian Masters, 2010. "Money in a Model of Prior Production and Imperfectly Directed Search," Discussion Papers 10-11, University at Albany, SUNY, Department of Economics.
  7. Bi, Sheng & Langot, François, 2014. "Search and Retirement under Asymmetric Information," IZA Discussion Papers 8288, Institute for the Study of Labor (IZA).
  8. James Albrecht, Pieter Gautier, Susan Vroman, 2013. "Efficient Entry in Competing Auctions," Working Papers gueconwpa~13-13-05, Georgetown University, Department of Economics.
  9. Feng, Shuaizhang & Zheng, Bingyong, 2009. "Cherry-Picking in Labor Market with Imperfect Information," IZA Discussion Papers 4309, Institute for the Study of Labor (IZA).
  10. Adrian Masters, 2008. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," 2008 Meeting Papers 260, Society for Economic Dynamics.
  11. Espen Moen & Anna Godøy, 2013. "Mixed search," 2013 Meeting Papers 857, Society for Economic Dynamics.

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