Search Frictions Research Articles

Search Frictions, Labor Supply, and the Asymmetric Business Cycle

We develop a business cycle model with search frictions in the labor market and a labor supply decision along the extensive margin that yields cyclical asymmetry between peaks and troughs of the unemployment rate and symmetric fluctuations of the labor force participation rate as in the U.S. data. We calibrate the model and find that cyclical changes in the extent of search frictions are solely responsible for the peak-trough asymmetry. Participation decisions do not generate asymmetry but contribute to the fluctuations in search frictions by changing the size and composition of the pool of job seekers, which in turn affects the tightness ratio and thereby slack in the labor market. The participation rate would be counterfactually asymmetric absent labor supply responses to shocks.

Profile Gating? Addressing Congestion to Improve Women’s Wellbeing on Online Matching Platforms

The problem of worsening gender skew is particularly damaging in the context of dating and matrimonial matching platforms since it affects the wellbeing and user experience of women participants. Gender skew could result in an odd-based approach by men, resulting in search frictions, congestions, and thus disempowerment for women participating on these platforms. If platforms do not ensure the equitable participation of women, it could lead to the unraveling of the platforms. In this paper, we look at how a platform-level intervention could reduce the congestion for women and thus improve their overall user experience on the platform. We specifically look at a form of

Searching Forever After

We study a model of two-sided search in which agents’ strategic reasoning is coarse. In equilibrium, the most desirable agents behave as if they were fully rational, while for all other agents, coarse reasoning results in overoptimism with regard to their prospects in the market. Consequently, they search longer than is optimal. Moreover, agents with intermediate match values may search indefinitely while all other agents eventually marry. We show that the share of eternal singles converges monotonically to one as search frictions vanish. Thus, improvements in search technology may backfire and even lead to market failure. (JEL C78, D11, D83, J12)

Experience Goods and Consumer Search

We introduce a search model where products differ in horizontal attributes and unobserved quality (“experience goods”), and firms can establish quality reputation. We show that the inability of consumers to observe quality before purchase significantly changes how search frictions affect market performance. In equilibrium, higher search costs reduce match values and increase price but can boost firms’ investment in product quality. Under plausible conditions, both consumer and total welfare initially increase in search cost, whereas both would monotonically decrease if quality were observable from search. We apply the analysis to online markets, where low search costs coexist with low-quality products. (JEL D11, D21, D83, L15)

Target-initiated takeover with search frictions

Although most takeover theories presume the acquirers initiate the transactions, many transactions are in reality initiated by targets. This paper attempts to understand such a target’s sellout timing and pricing decisions by developing a target-initiated model, in which the firm randomly and periodically meets high- and low-type acquirers and makes take-it-or-leave-it price offers. The model captures the illiquidity and heterogeneity of sellout opportunities. Optimally, the firm takes either a high-price strategy—making only a high-price offer in a good economic state— or a flexible strategy—even making a low-price offer in a very good economic state— based on a tradeoff between sellout pricing and timing efficiency. With higher frequency and heterogeneity of acquirers, the firm makes a high-price offer more eagerly and a low-price offer more restrictively. With asymmetric information, where the acquirer types are unobservable, the firm reduces the acquirer’s information rent by making a high-price offer more eagerly and restricting a low-price offer more severely. With higher economic state volatility, the low-type sellout probability increases because the economic state has a higher potential to increase beyond the low-price sellout threshold. The jump in firm value at the sellout time (i.e., target stock price reaction) is not monotonic with respect to the economic state and arrival rate due to the interactions between the sellout price and timing.

ENDOGENOUS PROCYCLICAL LIQUIDITY, CAPITAL REALLOCATION, AND q

AbstractCapital reallocation is procyclical and an economic boom has a cleansing effect by shifting the distribution of firms from low quality to high quality. We explain these facts by modeling search frictions for used capital in the business cycle. The article characterizes the stochastic equilibrium analytically to prove that the liquidity and the price of reallocated capital are procyclical endogenously. We calibrate the model and construct proxies in the data for the unemployment rate of capital and the time on the market. These two variables have a strong positive relationship in both the model and the data.

ADVERSE SELECTION, LEARNING, AND COMPETITIVE SEARCH

AbstractI develop a model that allows for an analysis of the effects of time on adverse selection in the presence of search frictions. I find that, as a firm takes longer to adjust a worker's contract in response to learning about his type, inefficient overwork during the time before wage adjustment (probation) decreases. This provides a rationale for an optimal (minimum) probation period of about one month in the baseline scenario. Optimal probation duration varies with the degree of search frictions, the cost of effort, the relative productivity of different types of workers, and minimum wage regulations.

Optimal taxation in asset markets with adverse selection

Constrained efficiency is characterized in an asset market, subject to search frictions, where sellers are privately informed about the type of their asset. The type determines the opportunity cost of the asset for sellers and the quality of the asset for buyers. The constrained-efficient allocation is implemented using a sales tax schedule. The optimal schedule has a single-crossing property, requiring the trading of low-quality assets to be subsidized and trading of high-quality assets to be taxed. Surprisingly, the optimal schedule could be non-monotonic in the quality or price of assets even when buyers and sellers agree on the ranking of assets. This result implies that using a linear tax schedule, as typically assumed in the literature, could significantly limit the benefits of taxation. The role of traditional search frictions, and the effects of higher measure of distressed sellers, higher quality of assets and more efficient matching technology on the optimal schedule are also studied.

To Brush or Not to Brush: Product Rankings, Consumer Search, and Fake Orders

Brushing—online merchants placing fake orders of their own products—has been a widespread phenomenon on major e-commerce platforms. One key reason why merchants brush is that it boosts their rankings in search results. Products with higher sales volume are more likely to rank higher. Additionally, rankings matter because consumers face search frictions and narrow their attention to only the few products that show up at the top. Thus, fake orders can affect consumer choice. In our paper, we find that if brushing gets more costly for merchants (e.g., due to stricter platform policies), it may sometimes surprisingly harm consumers as it may only blunt brushing by the merchant who sells a more popular product but intensify brushing by the merchant selling a less popular product. If search is less costly for consumers (e.g., due to improved search technologies), it may not always benefit consumers, either. Moreover, the design of the ranking algorithm is critical: placing more weight on sales-volume-related factors may trigger a nonmonotone change in consumer welfare; tracking recent sales only as opposed to cumulative sales does not always dial down brushing and, in fact, may sometimes cause the merchant selling a less popular product to brush more.

Competition in search markets with naive consumers

AbstractWe study a search market where firms may design products of inferior quality to promote them to naive consumers who misjudge product characteristics. We derive an equilibrium in which superior and inferior quality co‐exist and show that as search frictions vanish, the share of superior goods goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer for superior quality. Policy interventions that reduce search frictions such as the standardization of product information may harm welfare. In contrast, educating naive consumers as well as a minimum quality standard can improve welfare.

Automation, Bargaining Power, and Labor Market Fluctuations

We argue that the threat of automation weakens workers' bargaining power in wage negotiations, dampening wage adjustments and amplifying unemployment fluctuations. We make this argument based on a quantitative business cycle model with labor market search frictions, generalized to incorporate automation decisions and estimated to fit U.S. time series. In the model, procyclical automation threats create real wage rigidity that amplify labor market fluctuations. We find that this automation mechanism is quantitatively important for explaining the large volatilities of unemployment and vacancies relative to that of real wages, a puzzling observation through the lens of standard business cycle models.

Unobservable investments, trade efficiency and search frictions

AbstractInformation structure can affect market efficiency by influencing participants' investment incentives. In this case, the entrants' type distribution and the market trade efficiency are both affected by the information structure, so they are jointly determined and correlated. In order to investigate the effects of asymmetric information, this paper uses a random search model of ex ante investments and trade efficiency, assuming that the amount of investment remains the investor's private information. I show that the ex ante payoffs are equivalent to the equilibrium payoffs when investments are observable. In the unique steady state equilibrium, non‐degenerate investment distribution and price distribution emerge simultaneously with ex ante identical agents. The investments motivated by unobservability fail to improve social welfare due to the mismatches caused by unobservability. Allocating positive bargaining power to investors alleviates the mismatch problem and improves social welfare.

Start-up Search Costs

Workhorse economic models used for studying the market impacts of search frictions assume constant search costs: individuals pay the same cost to obtain price information each time they search. This paper provides evidence on a new form of search costs: start-up costs. Exploiting a natural experiment in retail gasoline, we document how a temporary, large exogenous shock to consumers’ search incentives leads to a substantial, permanent increase in price search. A standard search model fails to explain such history dependence in search, while it follows directly from a model with a one-time up-front cost to start searching. (JEL D83, L13, L81)

RIROSE: Rational Information Retrieval in Online Search Environments

<h2>Abstract</h2> We design a benchmark algorithm that mimics the sequential behavior of users when retrieving information from the set of alternatives provided by an engine within the first page of online search results. The benchmark defined by the algorithm is designed to evaluate deviations from the rational retrieval strategies determined by the subjective preferences and beliefs of users. The algorithm accounts for the 2047 nodes composing the binary decision tree defined by the ten alternatives ranked within the first page of results. The flexibility of the algorithm allows to incorporate modifications accounting for search frictions and different degrees of impatience on the side of users, as well as testing the categorization capacities of machine learning techniques.

Modelling the Differing Impacts of Covid-19 in the UK Labour Market.

This article studies the impact of the Covid‐19 pandemic on graduates and non‐graduates in the United Kingdom. We construct a DSGE model with search frictions that is designed around key features of the UK labour market and simulate the model using an array of shocks, designed to mimic the impact of the Covid‐19 pandemic. We show that our relatively simple macroeconomic model can describe the impact of the pandemic on output, employment and wages. Our results show that the impact of the pandemic on employment and wages was more severe for non‐graduates than for graduates, and that up to 5 million jobs would have been lost in the first wave of the pandemic in the absence of the Job Retention Scheme.

Illiquidity in sovereign debt markets

We study sovereign debt and default policies when credit and liquidity risk are jointly determined. To account for both types of risks, we focus on an economy with incomplete markets, limited commitment, and search frictions in the secondary market for sovereign bonds. We quantify the effect of liquidity on sovereign spreads and welfare by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default in 2001. From a positive point of view, we find (a) that a substantial portion of sovereign spreads is due to a liquidity premium, and (b) the liquidity premium helps to resolve the “credit spread puzzle” by generating high average spreads while maintaining a low default frequency. From a normative point of view, we find that reductions in secondary market frictions improve welfare.

The Role of Search Frictions and Trading Ratios in Tradable Permit Markets

The Role of Search Frictions and Trading Ratios in Tradable Permit Markets

CFO Gaps: Determinants and Impact on the Corporate Information Environment

ABSTRACT A CFO gap arises when the CFO position is left vacant for a period between the departure of the old CFO and the appointment of a new CFO. We find that CFO gaps are fairly common; over the sample period 2004–2016, approximately one-third of CFO turnovers are associated with a CFO gap, lasting, on average, two quarters and two months. CFO gaps are more likely for firms that face more labor market search frictions and with financial reporting and performance issues, and are less likely for firms with succession plans and with greater growth opportunities. While CFO gaps are not associated with significant changes in firms' financial reporting quality, they are associated with significantly negative changes in firms' voluntary disclosure frequency and analysts' forecast quality. Our findings shed light on the factors that influence top executive gaps and the impact of such gaps on firms' information environment.

Firm and Worker Dynamics in a Frictional Labor Market

This paper integrates the classic theory of firm boundaries, through span of control or taste for variety, into a model of the labor market with random matching and on‐the‐job search. Firms choose when to enter and exit, whether to create vacancies or destroy jobs in response to shocks, and Bertrand‐compete to hire and retain workers. Tractability is obtained by proving that, under a parsimonious set of assumptions, all worker and firm decisions are characterized by their joint surplus, which in turn only depends on firm productivity and size. The job ladder in marginal surplus that emerges in equilibrium determines net poaching patterns by firm characteristics that are in line with the data. As frictions vanish, the model converges to a standard competitive model of firm dynamics. The combination of firm dynamics and search frictions allows the model to: (i) quantify the misallocation cost of frictions; (ii) replicate elusive life‐cycle growth profiles of superstar firms; and (iii) make sense of the failure of the job ladder around the Great Recession as a result of the collapse of firm entry.

Search Frictions and Product Design in the Municipal Bond Market

Search Frictions and Product Design in the Municipal Bond Market