Establishments Dynamics and Matching Frictions in Classical Competitive Equilibrium
50 Pages Posted: 14 Jan 2008
Date Written: November 2007
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.
Keywords: Firm dynamics, matching, unemployment, business cycles
JEL Classification: E32, J63, J64
Suggested Citation: Suggested Citation