Incentives in Competitive Search Equilibrium and Wage Rigidity
30 Pages Posted: 12 Dec 2005
Date Written: February 7, 2006
This paper examines the competitive search equilibrium when the workers' effort choice and type are private information. We derive a modified Hosios rule determining the allocation of resources and analyze how private information influences the responsiveness of the unemployment rate to changes in macroeconomic variables. Most importantly, private information increases the responsiveness of the unemployment rate to changes in the general (type and effort independent) productivity level. If the changes also affect the information structure, the responsiveness of the unemployment rate may be large even if the changes in expected productivity are small.
Keywords: incentives, contracts, unemployment, wage rigidity, labor market search
JEL Classification: J33, J64, J41, E24
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