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Market Power and Efficiency in a Search Model

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  • Galenianos, Manolis
  • Kircher, Philipp
  • Virag, Gabor

Abstract

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the high to the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.

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File URL: http://mpra.ub.uni-muenchen.de/17093/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17093.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:17093

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Keywords: directed search; heterogeneity; inefficient allocation; market power;

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References

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  1. Alan Manning, 2001. "Monopsony and the Efficiency of Labour Market Interventions," CEP Discussion Papers dp0514, Centre for Economic Performance, LSE.
  2. James Albrecht & Pieter Gautier & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Applications," Tinbergen Institute Discussion Papers 03-004/3, Tinbergen Institute, revised 14 Feb 2004.
  3. Marimon, Ramon & Zilibotti, Fabrizio, 1999. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(455), pages 266-91, April.
  4. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  5. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(5), pages 893-928, October.
  6. L. Kaas & P. Madden, 2006. "Minimum Wages and Welfare in a Hotelling Duopsony," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0604, Economics, The University of Manchester.
  7. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, Elsevier, vol. 111(2), pages 265-276, August.
  8. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Manolis Galenianos & Philipp A. Kircher, 2005. "Directed Search with Multiple Job Applications," Bonn Econ Discussion Papers, University of Bonn, Germany bgse20_2005, University of Bonn, Germany.
  10. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics.
  11. Philipp Kircher, 2009. "Efficiency of simultaneous search," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29703, London School of Economics and Political Science, LSE Library.
  12. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, Elsevier, vol. 98(2), pages 232-260, June.
  13. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 74, CREFE, Université du Québec à Montréal.
  14. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(1), pages 163-79, February.
  15. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum, Oslo University, Department of Economics 37/1995, Oslo University, Department of Economics.
  16. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, Econometric Society, vol. 59(5), pages 1425-54, September.
  17. Manolis Galenianos & Philipp Kircher, 2012. "On the game-theoretic foundations of competitive search equilibrium," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29707, London School of Economics and Political Science, LSE Library.
  18. David Card & Alan Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," Working Papers 694, Princeton University, Department of Economics, Industrial Relations Section..
  19. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(1), pages 1-21, January.
  20. Marja-Liisa Halko & Klaus Kultti & and Juha Virrankoski, 2008. "Search Direction And Wage Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 111-134, 02.
  21. Manolis Galenianos & Philipp Kircher, 2007. "Heterogeneous Firms in a Finite Directed Search Economy," PIER Working Paper Archive 07-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  22. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
  23. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
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Citations

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Cited by:
  1. Jean Guillaume Forand, 2007. "Competing Through Information Provision," 2007 Meeting Papers, Society for Economic Dynamics 661, Society for Economic Dynamics.
  2. Jan Eeckhout & Philipp Kircher, 2010. "Sorting versus screening: search frictions and competing mechanisms," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29704, London School of Economics and Political Science, LSE Library.
  3. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, Institute for the Study of Labor (IZA).
  4. Jacquet, Nicolas L. & Tan, Serene, 2012. "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(3), pages 1064-1104.

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