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What do Information Frictions do?

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Author Info
Joydeep Bhattacharya () (Iowa State University Economics Department)
Shankha Chakraborty () (University of Oregon Economics Department)

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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 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.

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Publisher Info
Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2003-4.

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Length: 33
Date of creation: 14 Feb 2003
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Handle: RePEc:ore:uoecwp:2003-4

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Related research
Keywords: Information Frictions Credit Frictions Efficiency Wage Unemployment

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Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

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References listed on IDEAS
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Full references

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  1. repec:hal:journl:hal-00243037_v1 is not listed on IDEAS
  2. Patricia Crifo & Hind Sami, 2006. "Entrepreneurship, technological change and endogenous returns to ability," Working Papers hal-00243037_v1, HAL. [Downloadable!]
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