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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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