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Search in the Labor Market Under Imperfectly Insurable Income Risk

  • Mauro Roca

This paper develops a general equilibrium model with unemployment and noncooperative wage determination to analyze the importance of incomplete markets when risk-averse agents are subject to idiosyncratic employment shocks. A version of the model calibrated to the U.S. shows that market incompleteness affects individual behavior and aggregate conditions: it reduces wages and unemployment but increases vacancies. Additionally, the model explains the average level of unemployment insurance observed in the U.S. A key mechanism is the joint influence of imperfect insurance and risk aversion in the wage bargaining. The paper also proposes a novel solution to solve this heterogeneous-agent model.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/188.

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Length: 37
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/188
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  1. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  2. James S. Costain & Michael Reiter, 2004. "Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets," Economics Working Papers 890, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  3. Alvarez, Fernando & Veracierto, Marcelo, 2001. "Severance payments in an economy with frictions," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 477-498, June.
  4. Rasmus Lentz, 2009. "Optimal Unemployment Insurance in an Estimated Job Search Model with Savings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 37-57, January.
  5. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Melvyn Cole & Randall Wright, . "A Dynamic Equilibrium Model of Search, Bargaining, and Money," CARESS Working Papres 97-9, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  8. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  9. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
  10. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers 200106, Rutgers University, Department of Economics.
  11. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2004. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Econometric Society 2004 North American Winter Meetings 411, Econometric Society.
  12. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers.
  13. Jonathan Gruber, 2001. "The Wealth of the unemployed," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 55(1), pages 79-94, October.
  14. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
  15. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  16. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  17. Henry Kim & Jinill Kim & Robert Kollmann, 2005. "Applying Perturbation Methods to Incomplete Market Models with Exogenous Borrowing Constraints," Discussion Papers Series, Department of Economics, Tufts University 0504, Department of Economics, Tufts University.
  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
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