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Market power and efficiency in a search model

  • Manolis Galenianos
  • Philipp Kircher
  • Gabor Virag

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the highto the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.

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File URL: http://eprints.lse.ac.uk/29706/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29706.

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Date of creation: 2011
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Publication status: Published in International Economic Review, 2011, 52(1), pp. 85-104. ISSN: 0020-6598
Handle: RePEc:ehl:lserod:29706
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  1. Alan Manning, 2001. "Monopsony and the efficiency of labour market interventions," LSE Research Online Documents on Economics 20097, London School of Economics and Political Science, LSE Library.
  2. Manolis Galenianos & Philipp Kircher, 2007. "Heterogeneous Firms in a Finite Directed Search Economy," PIER Working Paper Archive 07-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  4. David Card & Alan B. Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," NBER Working Papers 4509, National Bureau of Economic Research, Inc.
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  6. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  7. Albrecht, James & Gautier, Pieter A. & Vroman, Susan, 2003. "Equilibrium Directed Search with Multiple Applications," IZA Discussion Papers 719, Institute for the Study of Labor (IZA).
  8. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  9. Manolis Galenianos & Philipp Kircher, 2012. "On the game-theoretic foundations of competitive search equilibrium," LSE Research Online Documents on Economics 29707, London School of Economics and Political Science, LSE Library.
  10. Robert Shimer & Iván Werning, 2005. "Liquidity and insurance for the unemployed," Staff Report 366, Federal Reserve Bank of Minneapolis.
  11. Kaas, Leo & Madden, Paul, 2008. "Minimum Wages and Welfare in a Hotelling Duopsony," IZA Discussion Papers 3434, Institute for the Study of Labor (IZA).
  12. Ramon Marimon & Fabrizio Zilibotti, 1997. "Unemployment vs. mismatch of talents: Reconsidering unemployment benefits," Economics Working Papers 211, Department of Economics and Business, Universitat Pompeu Fabra.
  13. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
  14. Marja-Liisa Halko & Klaus Kultti & and Juha Virrankoski, 2008. "Search Direction And Wage Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 111-134, 02.
  15. Philipp Kircher, 2009. "Efficiency of Simultaneous Search," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 861-913, October.
  16. Galenianos, Manolis & Kircher, Philipp, 2009. "Directed search with multiple job applications," Journal of Economic Theory, Elsevier, vol. 144(2), pages 445-471, March.
  17. James D. Montgomery, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 163-179.
  18. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
  19. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  20. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
  21. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
  22. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  23. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
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