Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining
A matching model is used to analyze the effect of search frictions on incentives to invest in human and physical capital. Equilibrium involves inefficient (low) levels of investment. The source of the inefficiency cannot be attributed solely to either search or bargaining. Schemes that assist matching are Pareto-improving. While the ratio of workers to firms remains fixed, intermediaries that pay owners according to the amount of capital carried into the market are able to generate efficient outcomes. Such intervention may not eliminate inefficiencies when the ratio is endogenized. Policy implications include encouragement of investment (even while abstracting from growth). Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Volume (Year): 39 (1998)
Issue (Month): 2 (May)
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