Stochastic Search Equilibrium

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 22.06.2010, 12:15 - 13:30

   

Presentation by 

Fabien Postel-Vinay (University College London)
   

Abstract:

We study a stochastic economy where both employed and unemployed workers search randomly for labor contracts posted by ex ante heterogeneous firms, while aggregate productivity is subject to shocks. A firm can commit to a (Markov) contract, which specifies a wage contingent on all payoff-relevant states, but must pay equally all of its workers, who have limited commitment and are free to quit at any time. Our exercise provides the first dynamic stochastic general equilibrium analysis of a popular class of search wage-posting models, drawing in part from the literature on recursive contracts under moral hazard. An equilibrium of the contract-posting game is Rank-Preserving [RP] if larger firms offer a larger value to their workers in all states of the world. We find two sufficient (but not necessary) conditions for every equilibrium to be RP: either firms only differ in their initial size, or they also differ in their fixed idiosyncratic productivity but more productive firms are also initially weakly larger. In the latter case, turnover is always efficient, as workers always move from less to more productive firms. In both cases, the ranking of firm sizes never changes on the RP equilibrium path, a property that has two useful implications. First, the stochastic dynamics of firm size provide an intuitive and robust explanation for the empirical finding that large employers in the US are more cyclically sensitive (Moscarini and Postel-Vinay, 2009). Second, RP equilibrium computation is fairly tractable, and we construct and simulate calibrated examples.

   
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