The replacement problem in frictional economies: a near equivalence result
Per Krusell () and
Giovanni Violante ()
No 05-01, Working Paper from Federal Reserve Bank of Richmond
We examine how technological change affects wage inequality and unemployment in a calibrated model of matching frictions in the labor market. We distinguish between two polar cases studied in the literature: a \"creative destruction\" economy where new machines enter chiefly through new matches and an \"upgrading\" economy where machines in existing matches are replaced by new machines. Our main results are: (i) these two economies produce very similar quantitative outcomes, and (ii) the total amount of wage inequality generated by frictions is very small. We explain these findings in light of the fact that, in the model calibrated to the U.S. economy, both unemployment and vacancy durations are very short, i.e., the matching frictions are quantitatively minor. Hence, the equilibrium allocations of the model are remarkably close to those of a frictionless version of our economy where firms are indifferent between upgrading and creative destruction, and where every worker is paid the same market-clearing wage. These results are robust to the inclusion of machine-specific or match-specific heterogeneity into the benchmark model.
Keywords: Contracts; Technology (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed
Downloads: (external link)
http://www.richmondfed.org/publications/research/w ... /2005/pdf/wp05-1.pdf (application/pdf)
Journal Article: The Replacement Problem In Frictional Economies: A Near-Equivalence Result (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedrwp:05-01
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by ().