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Block recursive equilibria for stochastic models of search on the job

  • Menzio, Guido
  • Shi, Shouyong

We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 4 (July)
Pages: 1453-1494

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:4:p:1453-1494
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  18. Shouyong Shi, 2008. "Directed Search for Equilibrium Wage-Tenure Contracts," Working Papers tecipa-343, University of Toronto, Department of Economics.
  19. 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.
  20. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  21. 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.
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  25. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
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