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What do Information Frictions do?

Author

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  • Joydeep Bhattacharya

    (Iowa State University Economics Department)

  • Shankha Chakraborty

    (University of Oregon Economics Department)

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 differences 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 affecting investment and indirectly through the unemployment rate. The labor market friction, on the other hand, affects unemployment in the short- and long-run but has only a short-run effect on capital accumulation.

Suggested Citation

  • Joydeep Bhattacharya & Shankha Chakraborty, 2003. "What do Information Frictions do?," University of Oregon Economics Department Working Papers 2003-4, University of Oregon Economics Department.
    • Handle: RePEc:ore:uoecwp:2003-4
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    References listed on IDEAS

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    2. Vachadze, George, 2018. "Credit market imperfection, minimum investment requirement, and endogenous income inequality," Journal of Mathematical Economics, Elsevier, vol. 76(C), pages 62-79.
    3. Patricia Crifo & Hind Sami, 2008. "Entrepreneurship, technological change and endogenous returns to ability," Post-Print hal-00243037, HAL.
    4. Agliari, Anna & Vachadze, George, 2014. "Credit market imperfection, labor supply complementarity, and output volatility," Economic Modelling, Elsevier, vol. 38(C), pages 45-56.

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    More about this item

    Keywords

    Information Frictions; Credit Frictions; Efficiency Wage; Unemployment;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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