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Search, Concave Production, and Optimal Firm Size

  • Eric Smith

    (Department of Economics, University of Essex)

This paper demonstrates that in a free entry search and bargaining economy with concave production firms over-employ. Bargaining allows the worker's wage to depend upon marginal productivity. As such, with strictly concave production, the wage declines as firms employ more labour. Firms react to this declining wage function by choosing an inefficiently large number of workers. However, in equilibrium, fewer firms are likely to enter causing aggregate employment and vacancies to fall. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0056
File Function: Full text
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 2 (April)
Pages: 456-471

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Handle: RePEc:red:issued:v:2:y:1999:i:2:p:456-471
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  1. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  2. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Working Papers 680, Princeton University, Department of Economics, Industrial Relations Section..
  3. Coles, Melvyn G & Smith, Eric, 1994. "Cross-Section Estimation of the Matching Function: Evidence from England and Wales," CEPR Discussion Papers 966, C.E.P.R. Discussion Papers.
  4. Chalkley, Martin, 1991. "Monopsony Wage Determination and Multiple Unemployment Equilibria in a Non-linear Search Model," Review of Economic Studies, Wiley Blackwell, vol. 58(1), pages 181-93, January.
  5. Ronald G. Ehrenberg, 1992. "New minimum wage research: Symposium introduction," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 3-5, October.
  6. Berman, Eli, 1997. "Help Wanted, Job Needed: Estimates of a Matching Function from Employment Service Data," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S251-92, January.
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