Equilibrium Search Model Research Articles

An Equilibrium Search Model of the French Dual Market for Medical Services

The French market for specialist physician care has a dual structure, including a sector 1 with regulated fees, and a sector 2 where physicians can freely choose fees. Patients who undergo a sequential search process for the best medical offer develop a reservation fee decision rule. We analyzed physicians' decisions to work in sector 1 or in sector 2, and their choice of fee in sector 2. The model features several pure strategy equilibria that can be ordered with respect to patient welfare. Policy implications follow.

Marriage and Employment Participation with Wage Bargaining in Search Equilibrium.

The empirical literature addressing links between the labor and the marriage markets is numerous and varied. Despite this, the theoretical (equilibrium) literature that explicitly links the two markets is less developed, particularly so with frictional markets. We build an equilibrium search model where married couples make joint decisions on home production and labor market participation. We then analyze the implications of our results for a frictional marriage market allowing us to consider the interaction between both markets. A worker´s bargaining position reflects their own productivity, and also the employment status and conditions of their spouse. We find that couples with very different productivities have different strategies regarding labor market participation. In symmetric couples, the partners behave symmetrically. Workers get better job offers when their spouses are employed, and in some equilibria a person may search for transitory jobs with the sole purpose of raising the long-term wages of their spouse. In some cases, firms unilaterally increase a worker’s wage in order to reduce turnover, by ensuring that the spouse stays at home. Whether firms follow that strategy or not may be a matter of multiple equilibria, depending on parameter values. All this provides an additional explanation for wage and search behavior heterogeneity of similar workers and/or couples.

The Coconut Model with Heterogeneous Strategies and Learning

In this paper, we develop an agent-based version of the Diamond search equilibrium model - also called Coconut Model. In this model, agents are faced with production decisions that have to be evaluated based on their expectations about the future utility of the produced entity which in turn depends on the global production level via a trading mechanism. While the original dynamical systems formulation assumes an infinite number of homogeneously adapting agents obeying strong rationality conditions, the agent-based setting allows to discuss the effects of heterogeneous and adaptive expectations and enables the analysis of non-equilibrium trajectories. Starting from a baseline implementation that matches the asymptotic behavior of the original model, we show how agent heterogeneity can be accounted for in the aggregate dynamical equations. We then show that when agents adapt their strategies by a simple temporal difference learning scheme, the system converges to one of the fixed points of the original system. Systematic simulations reveal that this is the only stable equilibrium solution.

A Quantitative Theory of Time-Consistent Unemployment Insurance

During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. This paper endogenizes a time-consistent UI policy in a stochastic equilibrium search model, where a government without commitment to future policies chooses the UI benefit level and expected duration each period. A longer benefit duration increases unemployed workers' consumption but reduces job search, leading to higher future unemployment. Quantitatively, the model rationalizes most of the variations in benefit duration during the Great Recession. We use the framework to evaluate the effects of the 2009-2013 benefit extensions on unemployment and welfare.

Search, Matching and Training

We estimate a partial and general equilibrium search model in which firms and workers choose how much time to invest in both general and match-specific human capital. To help identify the model parameters, we use NLSY data on worker training and we match moments that relate the incidence and timing of observed training episodes to outcomes such as wage growth and job-to-job transitions. We use our model to offer a novel interpretation of standard Mincer wage regressions in terms of search frictions and returns to training. Finally, we show how a minimum wage can reduce training opportunities and decrease the amount of human capital in the economy.

Informal unemployment and education

Abstract This paper develops a four-sector equilibrium search and matching model with informal sector employment opportunities and educational choice. We show that underground activities reduce educational attainments if informal employment opportunities mainly are available for low-educated workers. A more zealous enforcement policy will in this case improve educational incentives as it reduces the attractiveness of remaining a low-educated worker. However, unemployment also increases. Characterizing the optimal enforcement policies, we find that relatively more audits should be targeted towards the sector employing low-educated workers; elsewise, a too low stock of educated workers is materialized.

Adverse Selection in the Labor Market and Slow Recoveries

In this paper I propose an equilibrium search and matching model with worker heterogeneity, asymmetric information, and endogenous separations, and argue that it can help our understanding of the U.S. labor market experience following the Great Recession of 2007–2009. Workers are heterogeneous in their ability, but a worker's ability becomes observable to a firm only after it hires the worker. This asymmetric information between former employers of a worker and his prospective employers has important implications for the response of the macroeconomy to shocks. I show that a deterioration in the distribution of ability in the pool of the unemployed leads firms to post fewer vacancies and to raise their hiring standards, thus lowering the job finding rates of all unemployed workers. The result is a slow recovery of employment and a shifting out of the Beveridge curve. I also theoretically characterize the impulse response of the economy to exogenous shocks to labor productivity and show that under plausible specifications of the general model the pool of the unemployed becomes more adversely selected in downturns. The model also provides an explanation for unemployment scarring: firms rationally discriminate against the long-term unemployed by demanding more unequivocally positive signals of their ability before hiring them. I further show that scarring is more severe for lower-ability workers and after deeper recessions. Finally, I discuss the relevant empirical literature and show that the evidence supports the predictions of the model.

OPTIMAL UNEMPLOYMENT INSURANCE: HOW IMPORTANT IS THE DEMAND SIDE?

I develop and calibrate an equilibrium search model with endogenous savings and search intensity. The wage is endogenized using Nash bargaining and the number of vacancies is tied down by a free entry condition. This allows me to conduct a counterfactual analysis of the optimal unemployment insurance (UI) level. The provision of UI is motivated by the worker's inability to perfectly insure against income shocks, but at the same time UI introduces distortions into workers' search intensity decisions and firm vacancy creation. I find that equilibrium effects are important. When the UI level is raised 25%, they constitute around one-third of the increase in total unemployment. However, even with limited savings by workers, optimal UI is close to zero. It is further shown that ignoring the possibility of self-insurance greatly affects the optimal UI level.

A Test of an Equilibrium Search Model

We test the predictions of an equilibrium search model about the effects of an increase in the maximum duration of unemployment benefits. We use the 1999 unemployment insurance reform of Portugal, a quasi-natural experiment. The reform increased the maximum duration of benefits for three groups of agents and maintained all features of the unemployment insurance for two other groups. We isolate the effects of the increase in the maximum duration of benefits and test the model. The model successfully predicts the effects on the unemployment rate, the labor force participation, and the levels of unemployment and employment.

Urbanization, inequality and property prices: Equilibrium pricing and transaction in the Chinese housing market

The particularly overheated Chinese housing market, with its soaring property prices, has attracted a large amount of research. We point out three of its striking empirical features, which current literature leaves unexplored: co-existence of steady growth of real transaction price and excess supply, accelerations in price-to-income ratio, and significantly strong positive correlation between real transaction prices and income inequality. A search-equilibrium model is built to explain these facts. Heterogeneous buyers and homogeneous sellers randomly search for partners to trade in a frictional property market. The search equilibrium of the property market is either a high-price-and-low-transaction elitist matching equilibrium, or a low-price-and-high-transaction pooled matching equilibrium. The terms of trade determine which equilibrium arises. Empirical observations argue for the development of China's property market through evolution from a pooled matching equilibrium to an elitist matching equilibrium. We set out to show that the market equilibrium is always inefficient, due to crowding out externalities and market incompleteness. Policy experiments support redistributive tax, as a means to improve social welfare.

Advertising intensity and welfare in an equilibrium search model

I analyze an equilibrium search model in a duopoly setting with bilateral heterogeneities in production and search costs in which firms can advertise by announcing price. I compare the market advertising level to the socially optimal level, where I find that costly search can improve welfare and that firms may under- or over-advertise relative to the social optimum depending on the costs of search. The results suggest that, in markets with sufficiently low search costs, firms are likely over-advertising relative to the socially optimal level, and vice versa for markets with sufficiently high search costs.

Discounts and Deadlines in Consumer Search

We present a new equilibrium search model where consumers initially search among discount opportunities, but are willing to pay more as a deadline approaches, eventually turning to full-price sellers. The model predicts equilibrium price dispersion and rationalizes discount and full-price sellers coexisting without relying on ex ante heterogeneity. We apply the model to online retail sales via auctions and posted prices, where failed attempts to purchase reveal consumers' reservation prices. We find robust evidence supporting the theory. We quantify dynamic search frictions arising from deadlines and show how, with deadline-constrained buyers, seemingly neutral platform fee increases can cause large market shifts. (JEL D11, D44, D83, L81)

Immigrant job search assimilation in Canada

AbstractImmigrant assimilation is a major issue in many countries. While most of the literature studies assimilation through a human capital framework, we examine the role of job search assimilation. To do so, we estimate an equilibrium search model of immigrants operating in the same labour market as natives, where newly arrived immigrants have lower job offer arrival rates than natives but can acquire the same arrival rates according to a stochastic process. Using Canadian panel data, we find substantial differences in job offer arrival and destruction rates between natives and immigrants that are able to account for three quarters of the observed earnings gap. The estimates imply that immigrants take on average 13 years to acquire the native search parameters. Due to immigrants facing much lower on‐the‐job offer arrival rates than natives, the model predicts that earnings growth through job search is minimal for immigrants prior to their job search assimilation.

Unemployment and Business Cycles

We develop and estimate a general equilibrium search and matching model that accounts for key business cycle properties of macroeconomic aggregates, including labor market variables. In sharp contrast to leading New Keynesian models, we do not impose wage inertia. Instead we derive wage inertia from our specification of how firms and workers negotiate wages. Our model outperforms a variant of the standard New Keynesian Calvo sticky wage model. According to our estimated model, there is a critical interaction between the degree of price stickiness, monetary policy, and the duration of an increase in unemployment benefits.

On-the-Job Search and City Structure

We investigate an equilibrium search model in which the search frictions are increasing with the distance to the central business district allowing for on-the-job search and endogenous (monopsony) wage formation and land allocation. We find that there are many different possible outcomes with respect to the location of unemployed workers within a metropolitan area. The city structure of the decentralized market is only efficient when commuting costs of the employed workers are large. Policies reducing the rental costs of unemployed workers for locations close to the central business district can potentially increase welfare.

Peer Effects in Sexual Initiation: Separating Demand and Supply Mechanisms

Most work on social interactions studies a single, composite effect of interactions within a group. Yet in the case of sexual initiation, there are two distinct social mechanisms - peer-group norms and partner availability with separate effects and different potential interventions. Here I develop an equilibrium search and matching model for first sexual partners that specifies distinct roles for these two mechanisms as part of demand and supply. I estimate the model using a national sample of high school students, with data over time on individual virginity status. The results indicate that peer-group norms have a large effect on the timing of sexual initiation for both boys and girls. Changes in opposite-gender search behavior (i.e., partner availability) also have a large impact on initiation rates for boys, but not for girls. The existence of a composite effect of social interactions is also confirmed using a standard method: instrumental variables estimation of linear regressions.

Search for an object with two attributes

This paper presents and analyzes a simple equilibrium search model. On one side, there is a population of searchers; on the other side, a population of objects. Searchers are strategic decision makers who are there to get matched to an object, while objects have no preferences or decisions to make. The main novelty is that an object is characterized by two attributes, but a searcher can observe only one at the point of decision. This generates some interesting phenomena such as multiplicity of equilibria, in some of which the searcher's payoff is a discontinuous function of the observed attribute and the adoption decision is not everywhere monotonic in the observed attribute.

Wage inequality: A structural decomposition

The objective of this paper is to study why some workers are paid more than others. To do so we construct and quantitatively assess an equilibrium search model with on-the-job search, general human capital accumulation and two sided heterogeneity. In the model workers differ in abilities and firms differ in their productivities. The model generates a simple (log) wage variance decomposition that is used to measure the importance of firm and worker productivity differentials, frictional wage dispersion and workers' sorting dynamics. We calibrate the model using a sample of young workers from the UK. We show that heterogeneity among firms generates great deal of wage inequality. Among low skilled workers job ladder effects are small, most of the impact of experience on wages is due to learning-by-doing. High skilled workers are much more mobile. Job ladder effects have sizeable impact.

Peer effects in sexual initiation: Separating demand and supply mechanisms

Most work on social interactions studies a single, composite effect of interactions within a group. Yet in the case of sexual initiation, there are two distinct social mechanisms—peer‐group norms and partner availability—with separate effects and different potential interventions. Here I develop an equilibrium search and matching model for first sexual partners that specifies distinct roles for these two mechanisms as part of demand and supply. I estimate the model using a national sample of high school students, with data over time on individual virginity status. The results indicate that peer‐group norms have a large effect on the timing of sexual initiation for both boys and girls. Changes in opposite‐gender search behavior (i.e., partner availability) also have a large impact on initiation rates for boys, but not for girls. Social interaction models mechanisms sexual activity youth structural estimation C31 C33 J13

Occupational gender segregation in an equilibrium search model

Abstract This paper develops an equilibrium search model to explain gender asymmetry in occupational distribution. Workers’ utility depends on salary and working hours, and women have a greater aversion to longer working hours than men. Simulations indicate that women crowd into shorter-hour, lower-paying jobs than men. If employers discriminate against women, offers are tailored more toward the working-hour preferences of men by requiring longer working hours. Similarly, if women have a disutility factor in their utility toward positions with a higher proportion of men, fewer women work at these jobs. In both cases, gender segregation is reinforced. JEL classification: E24, J16, J64, J71