Stochastic Search Equilibrium

53 Pages Posted: 27 Feb 2010

See all articles by Giuseppe Moscarini

Giuseppe Moscarini

Yale University - Department of Economics; Cowles Foundation for Research in Economics

Fabien Postel-Vinay

Centre for Economic Policy Research (CEPR); University of Bristol; IZA Institute of Labor Economics; Centre for Structural Econometrics (CSE)

Date Written: February 25, 2010

Abstract

We analyze a stochastic equilibrium contract-posting model. Firms post employment contracts, wages contingent on all payoff-relevant states. Aggregate productivity is subject to persistent shocks. Both employed and unemployed workers search randomly for these contracts, and are free to quit at any time. An equilibrium of this contract-posting game is Rank-Preserving [RP] if larger firms offer a larger value to their workers in all states of the world. We show that every equilibrium is RP, and equilibrium is unique, if firms differ either only in their initial size, or also in their fixed idiosyncratic productivity but more productive firms are initially larger, in which case turnover is always efficient, as workers always move from less to more productive firms. The RP equilibrium stochastic dynamics of firm size provide an explanation for the empirical finding that large employers are more cyclically sensitive (Moscarini and Postel-Vinay, 2009). RP equilibrium computation is tractable, and we simulate calibrated examples.

Keywords: Equilibrium job search, Dynamic contracts, Stochastic dynamics

JEL Classification: J64, J31, D86

Suggested Citation

Moscarini, Giuseppe and Moscarini, Giuseppe and Postel-Vinay, Fabien and Postel-Vinay, Fabien, Stochastic Search Equilibrium (February 25, 2010). Cowles Foundation Discussion Paper No. 1754, Available at SSRN: https://ssrn.com/abstract=1559104 or http://dx.doi.org/10.2139/ssrn.1559104

Giuseppe Moscarini (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3596 (Phone)

HOME PAGE: http://www.econ.yale.edu/~mosca/mosca.html

Cowles Foundation for Research in Economics ( email )

Box 208281
New Haven, CT 06520-8281
United States

HOME PAGE: http://economics.yale.edu/people/giuseppe-moscarini

Fabien Postel-Vinay

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, Avon BS8 ITH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Structural Econometrics (CSE) ( email )

Department of Economics, University of Bristol
8 Woodland Road
Bristol, BS8 1TN
United Kingdom

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