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An Incentive Theory of Matching

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  • Brown, Alessio J. G.

    ()
    (IZA)

  • Merkl, Christian

    ()
    (University of Erlangen-Nuremberg)

  • Snower, Dennis J.

    ()
    (Kiel Institute for the World Economy)

Abstract

This paper presents a theory explaining the labor market matching process through microeconomic incentives. There are heterogeneous variations in the characteristics of workers and jobs, and firms face adjustment costs in responding to these variations. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. This approach obviates the need for a matching function. On this theoretical basis, we argue that the matching function is vulnerable to the Lucas critique. Our calibrated model for the U.S. economy can account for important empirical regularities that the conventional matching model cannot.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4145.

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Length: 29 pages
Date of creation: Apr 2009
Date of revision:
Publication status: forthcoming in: Macroeconomic Dynamics
Handle: RePEc:iza:izadps:dp4145

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Keywords: firing; quits; employment; unemployment; adjustment costs; incentives; matching; job offers; job acceptance;

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References

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  1. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Computing in Economics and Finance 2006 525, Society for Computational Economics.
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  8. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
  9. Carlos Thomas, 2006. "Search and matching frictions and optimal monetary policy," LSE Research Online Documents on Economics 19782, London School of Economics and Political Science, LSE Library.
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  21. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  22. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "Can Insider Power Affect Employment?," IZA Discussion Papers 506, Institute for the Study of Labor (IZA).
  23. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  24. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  25. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
  26. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 851-873, October.
  27. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
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