Journal Article

Incentives in Competitive Search Equilibrium

Espen R. Moen and Åsa Rosén

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 2, pages 733-761
Published in print April 2011 | ISSN: 0034-6527
Published online February 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdq011
Incentives in Competitive Search Equilibrium

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This paper proposes a labour market model with job search frictions where workers have private information on match quality and effort. Firms use wage contracts to motivate workers. In addition, wages are also used to attract employees. We define and characterize competitive search equilibrium in this context, and show that it satisfies a simple modified Hosios rule. We also analyse the interplay between macroeconomic variables and optimal wage contracts. Finally, we show that private information may increase the responsiveness of the unemployment rate to changes in the aggregate productivity level and, in particular, to changes in the information structure.

Keywords: Private information; Incentives; Search; Unemployment; Wage rigidity; E30; J30; J60

Journal Article.  12516 words. 

Subjects: Wages, Compensation, and Labour Costs ; Prices, Business Fluctuations, and Cycles ; Mobility, Unemployment, and Vacancies

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