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Block Recursive Equilibria for Stochastic Models of Search on the Job

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  • Guido Menzio
  • Shouyong Shi

Abstract

In this paper, we develop a general stochastic model of directed search on the job. Analogous to models of random search on the job, the state of the economy in our model includes the infinite-dimensional distribution of workers across different employment states (unemployment, and employment at different wages). Unlike the models of random search on the job, our model admits an equilibrium in which agents' value and policy functions do not depend on the distribution of workers. We refer to this type of equilibrium as a Block Recursive Equilibrium (BRE). Therefore, while solving the equilibrium of a random search model in a stochastic environment is a difficult task both analytically and computationally, solving the Block Recursive Equilibrium of our model is as easy as solving a representative agent model. We prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-347.

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Length: 49 pages
Date of creation: 13 Feb 2009
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-347

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Keywords: Directed Search; On the Job Search; Heterogeneity; Aggregate Fluctuations;

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References

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  5. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-437, University of Toronto, Department of Economics.
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  9. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, 03.
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  17. Christopher A. Pissarides, 1992. "Search Unemployment with on-the-job Search," CEP Discussion Papers dp0074, Centre for Economic Performance, LSE.
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  20. Guido Menzio, 2007. "A Theory of Partially Directed Search," PIER Working Paper Archive 09-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  21. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
  22. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  23. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
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  25. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
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