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Stochastic Search Equilibrium

  • Fabien Postel-Vinay

    (University of Bristol)

  • Giuseppe Moscarini

    (Yale University)

We study equilibrium wage and employment dynamics in a class of popular search models with wage posting, in the presence of aggregate productivity shocks. Firms offer and commit to (Markov) contracts, which specify a wage contingent on all payoff-relevant states, but must pay equally all of their workers, who have limited commitment and are free to quit at any time. We find sufficient conditions for the existence and uniqueness of a stochastic search equilibrium in such contracts, which is Rank Preserving [RP]: larger and more productive firms offer more generous contracts to their workers in all states of the world. On the RP equilibrium path, turnover is always efficient as workers always move from less to more productive firms. The resulting stochastic dynamics of firm size provide an intuitive explanation for the empirical finding that large employers have more cyclical job creation (Moscarini and Postel-Vinay, 2012). Finally, computation of RP equilibrium contracts is tractable.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 159.

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Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:159
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. Margaret Stevens, 2000. "Wage-Tenure Contracts in a Frictional Labour Market: Firms Strategies for Recruitment and Retention," Economics Series Working Papers 2000-W10, University of Oxford, Department of Economics.
  2. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
  3. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-327, University of Toronto, Department of Economics.
  4. Robert E. Hall, 2005. "Job Loss, Job Finding, and Unemployment in the U.S. Economy Over the Past Fifty Years," NBER Working Papers 11678, National Bureau of Economic Research, Inc.
  5. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  6. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "To Match or Not To Match ? Optimal Wage Policy with Endogenous Worker search Intensity," Working Papers 2002-59, Centre de Recherche en Economie et Statistique.
  7. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, 03.
  8. Giuseppe Moscarini & Fabien Postel-Vinay, 2009. "Large Employers Are More Cyclically Sensitive," NBER Working Papers 14740, National Bureau of Economic Research, Inc.
  9. Leena Rudanko, 2011. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 101(6), pages 2823-43, October.
  10. Carlos Carrillo-Tudela, 2009. "An Equilibrium Search Model When Firms Observe Workers' Employment Status," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 485-506, 05.
  11. Bontemps, Christian & Robin, Jean-Marc & van den Berg, Gerard J, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 305-58, May.
  12. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2003. "Wage bargaining with on-the-job search : theory and evidence," Research Unit Working Papers 0212, Laboratoire d'Economie Appliquee, INRA.
  13. Giuseppe Moscarini & Fabien Postel-Vinay, 2009. "The Timing of Labor Market Expansions: New Facts and a New Hypothesis," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 1-51 National Bureau of Economic Research, Inc.
  14. 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.
  15. Lucia Foster & John Haltiwanger & Chad Syverson, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," NBER Working Papers 11555, National Bureau of Economic Research, Inc.
  16. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, 09.
  17. repec:inr:wpaper:155908 is not listed on IDEAS
  18. 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.
  19. Caputo, Michael R., 2003. "The comparative dynamics of closed-loop controls for discounted infinite horizon optimal control problems," Journal of Economic Dynamics and Control, Elsevier, vol. 27(8), pages 1335-1365, June.
  20. Gadi Barlevy, 2008. "Identification of Search Models using Record Statistics," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 29-64.
  21. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
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