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Inefficient Unemployment Dynamics under Asymmetric Information

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  • Veronica Guerrieri

Abstract

I explore the efficiency properties of a competitive search model with match-specific private information and limited commitment on the workers' side. In a static setting the competitive search equilibrium is constrained efficient, whereas in a dynamic setting it is constrained inefficient whenever the initial unemployment rate is different from its steady-state level. Inefficiency arises because the workers' outside option becomes endogenous and affects the severity of the distortion due to the informational friction. This generates a novel externality: firms offering contracts at a given time do not internalize their effect on the outside option of workers hired in previous periods. (c) 2008 by The University of Chicago. All rights reserved.

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  • Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, August.
    • Handle: RePEc:ucp:jpolec:v:116:y:2008:i:4:p:667-708
    DOI: 10.1086/591910
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    References listed on IDEAS

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    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
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    5. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(2), pages 217-227.
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