Establishments Dynamics and Matching Frictions in Classical Competitive Equilibrium

50 Pages Posted: 14 Jan 2008

See all articles by Marcelo Veracierto

Marcelo Veracierto

Federal Reserve Bank of Chicago - Research Department

Date Written: November 2007

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.

Keywords: Firm dynamics, matching, unemployment, business cycles

JEL Classification: E32, J63, J64

Suggested Citation

Veracierto, Marcelo, Establishments Dynamics and Matching Frictions in Classical Competitive Equilibrium (November 2007). FRB of Chicago Working Paper No. 2007-16, Available at SSRN: https://ssrn.com/abstract=1083732 or http://dx.doi.org/10.2139/ssrn.1083732

Marcelo Veracierto (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
(312) 322-6595 (Phone)

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