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
In directed search with a finite population, minimum wages improve employment but reduce output and efficiency, and reverse for unemployment benefits.
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
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
Journal of Economic Theory, 2010/145, 1354-1385. With Jan Eeckhout. Search affects competing mechanisms: if meetings with low types reduce those of high types, price posting and market separation replace auctions. Go to paper
Quarterly Journal of Economics, 2008/123(2), pp. 621-661. With A. Postlewaite. [technical appendix] In a model of social learning, the better informed (wealthier) consumers get preferential service because their consumption signals high quality to others. 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 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