Equilibrium Wage and Employment Dynamics in a Model of Wage Posting without Commitment
A rich but tractable variant of the Burdett-Mortensen model of wage setting behavior is formulated and a dynamic market equilibrium solution to the model is defined and characterized. In the model, firms cannot commit to wage contracts. Instead, the Markov perfect equilibrium to the wage setting game, characterized by Coles (2001), is assumed. In addition, firm recruiting decisions, firm entry and exit, and transitory firm productivity shocks are incorporated into the model. Given that the cost of recruiting workers is proportional to firm employment, we establish the existence of an equilibrium solution to the model in which wages are not contingent on firm size but more productive employers always pay higher wages. Although the state space, the distribution of workers over firms, is large in the general case, it reduces to a scalar that can be interpreted as the unemployment rate in the special case of homogenous firms. Furthermore, the equilibrium is unique. As the dimension of the state space is equal to the number of firms types in general, an (approximate) equilibrium is computable.
|Date of creation:||Aug 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
|Order Information:|| Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fabien Postel-Vinay & Giuseppe Moscarini, 2013.
"Stochastic Search Equilibrium,"
2013 Meeting Papers
159, Society for Economic Dynamics.
- Giuseppe Moscarini & Fabien Postel-Vinay, 2010. "Stochastic Search Equilibrium," Levine's Working Paper Archive 661465000000000001, David K. Levine.
- Giuseppe Moscarini & Fabien Postel-Vinay, 2010. "Stochastic Search Equilibrium," Cowles Foundation Discussion Papers 1754, Cowles Foundation for Research in Economics, Yale University.
- Monika Merz & Eran Yashiv, 2007.
"Labor and the Market Value of the Firm,"
American Economic Review,
American Economic Association, vol. 97(4), pages 1419-1431, September.
- Monika Merz & Eran Yashiv, 2005. "Labor and the Market Value of the Firm," CEP Discussion Papers dp0690, Centre for Economic Performance, LSE.
- Monika Merz & Eran Yashiv, 2005. "Labor and the market value of the firm," LSE Research Online Documents on Economics 19891, London School of Economics and Political Science, LSE Library.
- Merz, Monika & Yashiv, Eran, 2004. "Labour and the Market Value of the Firm," CEPR Discussion Papers 4184, C.E.P.R. Discussion Papers.
- Merz, Monika & Yashiv, Eran, 2003. "Labor and the Market Value of the Firm," IZA Discussion Papers 965, Institute for the Study of Labor (IZA).
- Melvyn G. Coles, 2001. "Equilibrium Wage Dispersion, Firm Size and Growth," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 159-187, January.
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
- Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
- Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
- Guido Menzio & Shouyong Shi, 2010.
"Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations,"
American Economic Review,
American Economic Association, vol. 100(2), pages 327-32, May.
- Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," Working Papers tecipa-390, University of Toronto, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp5900. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)
If references are entirely missing, you can add them using this form.