Competitive equilibrium with search frictions: Arrow-Debreu meets Diamond-Mortensen-Pisarides
AbstractWhen the trading process is characterized by search frictions, traders may be rationed so markets need not clear. We argue that rationing can be part of general equilibrium, even if it is outside its normal interpretation. We build a general equilibrium model where the uncertainty arising from rationing is incorporated in the definition of a commodity, in the spirit of the Arrow- Debreu theory. Prices of commodities then depend not only on their physical characteristics, but also on the probability that their trade is rationed. The standard definition of a competitive equilibrium is extended by replacing market clearing with a matching condition. This condition relates the traders' rationing probabilities to the measures of buyers and sellers in the market via an exogenous matching function, as in the search models of Diamond (1982a, 1982b), Mortensen (1982a, 1982b) and Pissarides (1984, 1985). When search frictions vanish (so matching is frictionless) our model is equivalent to the competitive assignment model of Gretsky, Ostroy and Zame (1992, 1999). We adopt their linear programming approach to derive the welfare and existence theorems in our environment.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1039.
Date of creation: Dec 2010
Date of revision:
Search frictions; Competitive (price-taking) equilibrium; Matching function; Linear programming; Duality;
Find related papers by JEL classification:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-03 (All new papers)
- NEP-DGE-2011-01-03 (Dynamic General Equilibrium)
- NEP-MIC-2011-01-03 (Microeconomics)
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.:
- Mas-Colell, Andreu & Zame, William R., 1991. "Equilibrium theory in infinite dimensional spaces," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 34, pages 1835-1898 Elsevier.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Competitive equilibrium with search frictions: Arrow-Debreu meets Diamond-Mortensen-Pissarides
by Christian Zimmermann in NEP-DGE blog on 2011-01-19 22:23:33
- Belén Jerez, 2012. "Competitive equilibrium with search frictions : a general equilibrium approach," Economics Working Papers we1235, Universidad Carlos III, Departamento de Economía.
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