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Establishments dynamics and matching frictions in classical competitive equilibrium

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  • Marcelo Veracierto

Abstract

This paper develops a Walrasian equilibrium theory of establishment level dynamics and matching frictions and uses it to evaluate the effects of congestion externalities in the matching process and determine the government interventions that are needed to implement a Pareto optimal allocation. The optimal policy, which involves a tax on the creation of help-wanted ads and an unemployment subsidy, is highly contractionary. However, it leads to large welfare gains. The policy also plays an important role in dampening the response of the economy to aggregate productivity shocks.

Suggested Citation

  • Marcelo Veracierto, 2007. "Establishments dynamics and matching frictions in classical competitive equilibrium," Working Paper Series WP-07-16, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-07-16
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    Cited by:

    1. Lawrence Christiano & Mathias Trabandt & Karl Walentin, 2021. "Involuntary Unemployment and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 26-54, January.
    2. Aysegul Sahin & Bart Hobijn, 2008. "Wage Determination and Firm Size Dynamics," 2008 Meeting Papers 356, Society for Economic Dynamics.
    3. Shigeru Fujita & Makoto Nakajima, 2016. "Worker Flows and Job Flows: A Quantitative Investigation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 1-20, October.
    4. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Employment and firm heterogeneity, capital allocation, and countercyclical labor market policies," Journal of Development Economics, Elsevier, vol. 127(C), pages 25-41.
    5. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367, Elsevier.
    6. Veracierto, Marcelo, 2008. "On the cyclical behavior of employment, unemployment and labor force participation," Journal of Monetary Economics, Elsevier, vol. 55(6), pages 1143-1157, September.
    7. Mr. Ruy Lama & Carlos Urrutia, 2011. "Employment Protection and Business Cycles in Emerging Economies," IMF Working Papers 2011/293, International Monetary Fund.

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    Keywords

    Unemployment; Business cycles; Labor turnover;
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