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What do information frictions do?

Listed author(s):
  • Joydeep Bhattacharya

    ()

  • Shankha Chakraborty

    ()

We present an overlapping generations model in which a labor market friction (moral hazard) coexists and interacts with a credit market friction (costly state verification). Our main results are: (i) while credit market frictions have long- and short-run real effects, labor market frictions typically have only short-run effects unless they also affect the volume of investment per worker, (ii) the frictions amplify each other to produce higher long-run unemployment than would result from only labor market frictions, (iii) these distortions may prolong the effect of temporary shocks, and (iv) the dynamics of economies with both frictions are qualitatively similar to their frictionless counterparts. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0518-0
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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 3 (October)
Pages: 651-675

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Handle: RePEc:spr:joecth:v:26:y:2005:i:3:p:651-675
DOI: 10.1007/s00199-004-0518-0
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Web page: http://saet.uiowa.edu/

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