Stochastic Search Equilibrium

Giuseppe Moscarini and Fabien Postel-Vinay

No 1754, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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 (search for similar items in EconPapers)
JEL-codes: D86 J31 J64 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2010-02
New Economics Papers: this item is included in nep-bec, nep-cta, nep-dge and nep-lab
Note: CFP 1392
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Published in Review of Economic Studies (2013), 80(4): 1545-1581

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Related works:
Journal Article: Stochastic Search Equilibrium (2013)
Working Paper: Stochastic Search Equilibrium (2013)
Working Paper: Stochastic Search Equilibrium (2013)
Working Paper: Stochastic Search Equilibrium (2013)
Working Paper: Stochastic Search Equilibrium (2010)
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