What do information frictions do?

Joydeep Bhattacharya and Shankha Chakraborty

Economic Theory, 2005, vol. 26, issue 3, 675 pages

Abstract: We present an overlapping generations model in which a labor market friction (moral hazard) coexists and interacts with a credit market friction (costly state verification). Our main results are: (i) while credit market frictions have long- and short-run real effects, labor market frictions typically have only short-run effects unless they also affect the volume of investment per worker, (ii) the frictions amplify each other to produce higher long-run unemployment than would result from only labor market frictions, (iii) these distortions may prolong the effect of temporary shocks, and (iv) the dynamics of economies with both frictions are qualitatively similar to their frictionless counterparts. Copyright Springer-Verlag Berlin/Heidelberg 2005

Keywords: Moral hazard; Costly state verification; Contracts; Dynamics; Growth models. (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: What do Information Frictions do? (2005)
Working Paper: What do information frictions do? (2004)
Working Paper: What Do Information Frictions Do? (2003)
Working Paper: What do Information Frictions do? (2003)
Working Paper: What do Information Frictions Do? (2003)
Working Paper: What do Information Frictions Do? (2003)
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DOI: 10.1007/s00199-004-0518-0

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