We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the high to the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.
Market Power and Efficiency in a Search Model
International Economic Review, 2011, 52(1), pp 85-104. With M. Galenianos and G. Virag.
In directed search with a finite population, minimum wages improve employment but reduce output and efficiency, and reverse for unemployment benefits.
B.E. Journals of Theoretical Economics, 2013, Vol 13 (1). With S. Ludwig and A. Sandroni. We document a revealed preference for randomization for “social goods”, while such non-standard behavior is not present for private consumption goods. Go to paper
International Economic Review, 2012, Vol 53 (1), 1-21. With M. Galenianos. We study a finite directed-search wage posting game among heterogeneous firms (allowing for risk aversion, moral hazard,…), including limit theorems. Go to paper
American Economic Journal - Macroeconomics, 2022, 14(4), 1-97, with Michèle Belot and Paul Muller. In a field experiment, we study how job seekers respond to posted wages by randomly assigning wages randomly to pairs of otherwise similar vacancies in a large number of professions, which generates significantly more but not exclusive interest at higher wages. Go to paper
Econometrica. 2018 86(1): 85-132. With Jan Eeckhout. When heterogeneous firms can choose both how many and which workers to hire, we illustrate consequences for firm-size and wage inequality. Note a correction for the condition with capital: corrigendum. Go to paper
Econometrica, 2015, Vol 83 (5), 1849-1875. With K. Kim. [online appendix] We introduce cheap-talk into a market game and study if the equilibrium can replicate the constraint efficient allocation under (reserve) price posting. Go to paper
American Economic Review, 2015, Vol 105 (10), 3030-3060. With Leo Kaas. We propose a tractable competitive search model with heterogeneous multi-worker firms, and investigate firm growth and business cycles. Go to paper
Journal of Political Economy, 2017, 124(1), 224-264. With G. Grossman & E. Helpman. (simulations, matlab). We introduce two-sided heterogeneity into a Hecksher-Ohlin-style trade model to study factor reallocation and wage inequality within and across sectors. Go to paper
Review of Economic Studies, 2011, Vol. 78 (3), 872-906. With Jan Eeckhout. Wage and employment data can identify the strength of sorting in search models, though two-sided fixed effects are always mis-specified. Go to paper