Between Search and Walras

Abstract

This paper presents a framework that nests search and Walrasian-type models to study the evolution of stationary equilibria in the region between the two approaches. In our model unemployed workers can simultaneously approach n firms every period. We regard n as a proxy for information completeness: the more firms a worker samples, the better informed he is about the labor market conditions. Low n's yield wage dispersion below the marginal product of labor, as in typical search models. As n increases the equilibrium wage structure transforms to the Walrasian-type. Subjected to random shocks, the equilibrium results in of wage rigidity. We study the evolution of stationary equilibria in a framework that nests search and Walrasian-type models. In our model unemployed workers simultaneously approach n firms every period. Low n yields wage dispersion below the MPL, which is typical for search models. Interestingly, the Walrasian-type equilibrium obtains for relatively small values of n: all firms offer wage equal to MPL, yet unemployment persists. A hybrid equilibrium type prevails for intermediate values of n. Subjected to random shocks, the equilibrium yields wage rigidity. The model yields empirical predictions on unemployment.