Search Unemployment in an Overlapping-Generations Setting

Abstract

This paper constructs an overlapping-generations model in which the steady-state equilibrium is characterized by the existence of search unemployment. This dynamic general equilibrium model captures the possible existence of search unemployment in the long run despite the absence of exogenous shocks. Furthermore, it allows for the wage offers' distribution to be determined endogenously. The effect of partial revelation of information on the existence of search unemployment in the long run is examined. It is shown that search unemployment may be eliminated in the long run despite the persistence of the state of imperfect information. This paper develops an overlapping-generations model in which the steady-state equilibrium is characterized by search unemployment.2 Unemployment is created via a rational rejection of available wage offers in favor of further search for potentially more attractive offers. The proposed dynamic general equilibrium model allows for the existence of long-run search unemployment, despite the absence of exogenous shocks, and permits the presence of an endogenously determined nondegenerate wage offer distribution.3 The paper analyzes the trade-off between revelation of information and the level of search unemployment in the long run. In the absence of external disturbances the level of search unemployment would be expected to decrease as information becomes available. In particular, if information is fully revealed search unemployment is naturally eliminated. Exploring the likelihood of the existence of long-run search unemployment in a deterministic world, this study provides an example of partial revelation of information which eliminates search unemployment in the long run despite the persistence of the state of imperfect information.4 The proposed model presents a discrete infinite time horizon world where economic activity is conducted under imperfect information. In every period a single homogeneous good is produced using two factors, capital and labor, in the production process. The aggregate endowment of labor is exogenously given in