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What do information frictions do?

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Author Info
Bhattacharya, J.
Chankraborty, S. (Tilburg University, Center for Economic Research)

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Abstract

Numerous researchers have incorporated labor or credit market frictions within simple neoclassical models to (i) facilitate quick departures from the Arrow-Debreu world, thereby opening up the role for institutions, (ii) inject some realism into their models, and (iii) explain cross country di.erences in output and employment. We present an overlapping generations model with production in which a labor market friction (moral hazard) coexists along with a credit market friction (costly state verification). The simultaneous presence and interaction of these two frictions is studied. We show that credit frictions have a multiplier effect on economic activity, by directly a.ecting investment and indirectly through the unemployment rate. The labor market friction, on the other hand, a.ects unemployment in the short- and long-run but has only a short-run effect on capital accumulation.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 21.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:200321

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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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  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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