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Island Matching

Dale Mortensen

No 142, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: The purpose of this paper is to use Shimer's (2006) mismatch structure to create a synthesis of the Lucas-Prescott island model and the Diamond-Mortensen-Pissarides matching model of unemployment. The wage and employment are determined by an auction on each island. All unmatched agents are randomly assigned to another market at the beginning of each period. The number of unmatched jobs is determined by free entry. The model has a dynamic equilibrium solution which is unique and efficient in the limit as the number of workers and job per market become large. When calibrated to the recently observed unemployment and vacancy rates, the model fits the vacancy-unemployment relationship well and implies a log linear relationship between the job finding rate and the vacancy-unemployment relationship. Finally, the model's implied responses to productivity shocks that are much larger than the canonical equilibrium model of unemployment.

Date: 2007
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Journal Article: Island matching (2009) Downloads
Working Paper: Island Matching (2007) Downloads
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