Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium

This paper extends the bargaining and matching literature, such as Rubinstein and Wolinsky (1985), by considering a new matching process. We assume that a central information agency exists, such as real estate agencies in the housing market and employment agencies (or newspapers) in the labour market, which puts traders into direct contact with each other. With heterogeneity of trader preferences, equilibrium trade is characterized by existing traders on each side of the market trying to match with the flow of new traders on the other side (since existing traders have already sampled and rejected each other). Two procedures of trade co-exist, namely a strategic bilateral bargaining process and a competitive bidding process, depending on the number of potential matches a new trader obtains. We characterize the unique symmetric Markov perfect equilibrium to this stochastic trading game.     

Unravelling of Dynamic Sorting

We consider a two-sided, finite-horizon search and matching model with heterogeneous types and complementarity between types. The quality of the pool of potential partners deteriorates as agents who have found mutually agreeable matches exit the market. When search is costless and all agents participate in each matching round, the market performs a sorting function in that high types of agents have multiple chances to match with their peers. However, this sorting function is lost if agents incur an arbitrarily small cost in order to participate in each round. With a sufficiently rich type space, the market unravels as almost all agents rush to participate in the first round and match and exit with anyone they meet.     

Stock-flow matching and the performance of the labor market

We estimate outflow equations for vacancies and unemployed workers in Britain, departing from the stock-based analysis of matching in two ways. First, we deal with the temporal aggregation problem that arises when discrete time data are used to describe continuous time processes. Second, we allow for a stock-flow matching mechanism in which the stock of traders on one side of the market matches with the flow of traders on the other side. Our estimates are in line with the predictions of stock-flow matching in terms of higher exit rates of flows and of matching combinations between labor market stocks and flows. Furthermore, employer search effectiveness did not seem to decline between the 1960s and the 1990s. Nevertheless, some deterioration in worker search effectiveness is detected, however less severe than that implied by previous, stock-based work.     

Price formation in a matching market with targeted offers

We model a market where the surpluses from seller–buyer matches are heterogeneous but common knowledge. Price setting is synchronous with search: buyers simultaneously make one personalized offer each to the seller of their choice. With impatient players efficient coordination is not possible, and both temporary and permanent mismatches occur. Nonetheless, for patient players efficient matching (with monopsony wages) is an equilibrium. The setting is inspired by a labor market for highly skilled workers, such as the academic job market, but it can be easily adapted to, for example, the housing market or Internet advertising auctions.     

The pre-marital investment game

Two sides of a finite marriage market engage in costly investment and are then matched assortatively. The purpose of the investment is solely to improve the quality of the match that the trader can attain in the second stage. The paper studies the limits of equilibrium of these finite matching games as the number of traders gets large. It is shown that mixed Nash equilibria in the finite games converge to degenerate pure strategy equilibria in the limit in which both sides of the market invest too much.     

The great Canadian recovery: The impact of COVID-19 on Canada's labour market

The Canadian labour market experienced a period of unprecedented turmoil following the onset of the COVID-19 pandemic. We analyze the main changes using standard labour force statistics and new data on job postings. Envisaging a phase of temporary severing of employment relationships followed by a phase of more standard labour market search and matching, we use stock and flow data to understand key developments. We find dramatic changes in employment, unemployment and labour market attachment in the first few months of the pandemic and a broad though gradual recovery through to the end of 2021.     

Hangovers

This paper analyzes a process by which a market boom brought on by a temporary increase in the flow of buyers, can subsequently lead to a collapse of liquidity (speed of sale), prices and production to levels lower than before the onset of the boom. I consider a general model of markets subject to search frictions in the matching of buyers and sellers, where the entry of buyers and sellers (through production) are subject to adjustment costs. The resulting co-movement between unemployment, inventories and sales with the production cycle matches the stylized facts.     

Demand and supply effects of bargaining power shocks

In times of crisis, social partners may consider a temporary decline in wages as a necessity to maintain employment. This paper studies the opposing demand and supply effects following declining bargaining power of workers in a New-Keynesian model with search and matching in the labour market. Lower labour income reduces aggregate demand in the presence of credit-constrained consumers. The main result is that falling bargaining power contracts output notably when monetary policy is constrained by the zero lower bound or when agents' expectations about the persistence of the shock adjust slowly.     

Search,shirking and labor market volatility

This paper proposes a modified version of the standard search and matching model of the labour market that includes a shirking mechanism. We show that our model delivers a close match to the simulated volatilities, correlations and autocorrelations of unemployment, vacancies, labour market tightness and the job finding rate with values observed in US data. In doing so, it outperforms prominent alternative models. Our model also has novel policy implications for the impact of income taxes, subsidies on hiring and employment taxes on unemployment and its volatility.     

ON EMPLOYMENT CONTRACTS WITH ENDOGENOUS ON-THE-JOB SEARCH

We consider an equilibrium search model and employment contracts when workers have endogenous on-the-job search. When a firm tries to retain an employee by matching outside offers, variable search intensity leads to a moral hazard problem. We first consider workers with identical productivities. We derive an equilibrium where firms commit not to respond to outside offers and workers search less. Second, we investigate the case with heterogeneous workers and asymmetric information. Assuming that firms can commit to retain all workers irrespective of their ability, we establish conditions under which it is optimal to do so. This policy again reduces the incentive for active on-the-job search. We discuss an equilibrium where all firms use these so-called ‘pooling’ contracts.     

Sorting by search intensity

In this paper, I characterize matching in an on-the-job search model with endogenous search intensity, heterogeneous workers and firms, and match surplus is shared between workers and firms through bargaining. I provide proof of existence and uniqueness of steady state equilibrium. Given equally efficient matched and unmatched search, the worker skill conditional distribution of firm productivity over matches is stochastically increasing (decreasing) in worker skill if the production function is supermodular (submodular). I also show that this strong notion of sorting does not obtain everywhere for the firm productivity conditional match distribution.     

Core competencies,matching and the structure of foreign direct investment

We develop a matching model of foreign direct investment to study how multinational firms choose between greenfield investment, acquisitions and joint ownership. Firms must invest in a continuum of tasks to bring a product to market. Each firm possesses a core competency in the task space, but the firms are otherwise identical. For acquisitions and joint ownership, a multinational enterprise (MNE) must match with a local partner that may provide complementary expertise within the task space. However, under joint ownership, investment in tasks is shared by multiple owners and, hence, is subject to a holdup problem that varies with contract intensity. In equilibrium, ex ante identical multinationals enter the local matching market, and, ex post, three different types of heterogeneous firms arise. Specifically, the worst matches are forgone and the MNEs invest greenfield; the middle matches operate under joint ownership; and the best matches integrate via full acquisition. We link the firm‐level model to cross‐country and industry predictions and find that a greater share of full acquisitions occur between more proximate markets, in hosts with greater revenue potential and within contract‐intensive industries. Using data on partial and full acquisitions across industries and countries, we find robust support for these predictions.     

Two-sided matching with interdependent values

We introduce and study two-sided matching with incomplete information and interdependent valuations on one side of the market. An example of such a setting is a matching market between colleges and students in which colleges receive partially informative signals about students. Stability in such markets depends on the amount of information about matchings available to colleges. When colleges observe the entire matching, a stable matching mechanism does not generally exist. When colleges observe only their own matches, a stable mechanism exists if students have identical preferences over colleges, but may not exist if students have different preferences.     

Public Employment and the Business Cycle*

We add a public employment sector to the basic search and matching model in order to study the business cycle impact of public wage and employment policies. The government is assumed to follow exogenous rules for public wages and employment calibrated to match some cyclical features of US policies. These features include a positive public wage premium and mildly procyclical public wages and employment. We find that the presence of the public sector increases the volatility of employment and output.     

A search model of centralized and decentralized trade

This paper presents a search model of centralized and decentralized trade. In a centralized market, trades are intermediated by market makers at publicly posted bid–ask prices. In a decentralized market, traders search counterparties. Prices are negotiated and transactions are conducted in private meetings among traders. Traders can choose which market to enter. The determinants of bid–ask spreads and liquidity are analyzed. The welfare consequence of the market fragmentation is also analyzed. It is shown that compared to the competitive market-making, monopolistic market-making may improve social welfare.     

LIFE‐CYCLE LABOR SEARCH WITH STOCHASTIC MATCH QUALITY

In the United States, unemployment, job finding, and separation rates decline as worker age increases. To explain these facts, we build a search and matching model of the labor market that incorporates a life‐cycle structure and features random match quality as well as human capital accumulation. The calibrated model successfully reproduces the empirical patterns of unemployment and job transition rates over the life cycle and generates plausible wage implications. We then explore the efficiency implications of the model and find that the differences between the market and planner allocations are more important for older workers.     

Some Empirical Evidence of the Efficacy of Job Matching in Urban Labor Markets

Theory predicts that workers in cities are more likely to engage in job search, ceteris paribus, due to market efficiencies associated with greater job density. However, if job search is more efficient in urban markets, then the quality of a given job match should also tend to be higher in cities, ceteris paribus. Employed workers living in cities might then be expected to search less than their nonurban counterparts. In this latter instance, it is not city residency itself that makes search less likely, but rather the positive correlation between city residency and job match quality. Using data from the National Longitudinal Survey of Youth 1979, this prediction is confirmed: The estimated coefficient on an indicator of urban residency is found to be near zero and statistically insignificant in models of employed search that omit proxies for job match quality. When job match proxies are included in the models, the estimated coefficient on urban residency becomes positive and highly significant. This result suggests that workers are not only more likely to engage in employed search in urban labor markets, but also tend to find more productive job matches in cities over time.

Choice and success of job search methods

Job seekers influence the arrival rate of job offers by the choice of search effort and the search methods they use. In this paper we empirically investigate the effect of different search methods on search outcomes. We use unique data on the search behavior of job seekers in Austria, which matches survey information with administrative records. We analyze the quality of job matches in terms of wages and job durations for employed and unemployed workers. We find that the public employment office specializes in the support of low quality workers. For them it is equally efficient as other search channels.     

Money in the pure consumption loan model

The purpose of this paper is to show how modern techniques of Temporary competitive equilibrium analysis can be applied to models of the “pure consumption loan model” type. One considers Samuelson's simplest model where traders live two periods and where money is the only store of value. It is proved that a temporary equilibrium exists if price expectations are sufficiently independent of current prices. A stationary market equilibrium is shown to exist if there is a set of traders (i) whose total resources are greater when they are young than when they are old, (ii) who are indifferent between present and future consumption. It is proved that this existence theorem still holds if the economy is sufficiently “close” to an economy which has this property. A stationary market equilibrium is shown to be Pareto optimal if all traders hold positive cash balances. It may be inefficient if this condition is not satisfied, for some traders may then be willing to borrow, which they cannot do in this model.     

Wage Posting in Two-Sided Search and the Minimum Wage

This article focuses on wage formation in an equilibrium (two-sided) model of search with match-specific heterogeneity. Despite a large number (a continuum) of employers, search provides sufficient isolation to generate market power. By posting wages, employers, without collusion, capture most of the surplus that accrues to any match. The equilibrium wage is below that which maximizes employment. An example, using calibrated parameter values, is used to reconcile some recent, otherwise contradictory empirical results on the employment effects of minimum wage adjustments.