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Island Matching

  • Dale T. Mortensen

    (Northwestern University and Aarhus University)

The purpose of this paper is to use Shimer's (2006) mismatch structure to create a synthesis of the Lucas-Prescott island model and the Diamond-Mortensen-Pissarides matching model of unemployment. The wage and employment are determined by an auction on each island. All unmatched agents are randomly assigned to another market at the beginning of each period. The number of unmatched jobs is determined by free entry. The model has a dynamic equilibrium solution which is unique and efficient in the limit as the number of workers and job per market become large. When calibrated to the recently observed unemployment and vacancy rates, the model fits the vacancy-unemployment relationship well and implies a log linear relationship between the job finding rate and the vacancy-unemployment relationship. Finally, the model's implied responses to productivity shocks that are much larger than the canonical equilibrium model of unemployment.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 142.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:142
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  2. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  3. Marcus Hagedorn & Iourii Manovskii, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," 2005 Meeting Papers 460, Society for Economic Dynamics.
  4. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  5. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-74, September.
  6. Julien, Benoit & Kennes, John & King, Ian, 2006. "The Mortensen rule and efficient coordination unemployment," Economics Letters, Elsevier, vol. 90(2), pages 149-155, February.
  7. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  8. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  9. Peter Diamond & Drew Fudenberg, 1987. "Rational Expectations Business Cycles in Search Equilibrium," Working papers 465, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
  11. Mortensen, Dale T, 1999. "Equilibrium Unemployment Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 889-914, November.
  12. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  13. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
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