Block recursive equilibria for stochastic models of search on the job

Guido Menzio; Shouyong Shi

doi:10.1016/j.jet.2009.10.016

Block recursive equilibria for stochastic models of search on the job

Guido Menzio
, Shouyong Shi

Economics

Research output: Contribution to journal › Article › peer-review

79 Scopus citations

Abstract

We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.

Original language	English (US)
Pages (from-to)	1453-1494
Number of pages	42
Journal	Journal of Economic Theory
Volume	145
Issue number	4
DOIs	https://doi.org/10.1016/j.jet.2009.10.016
State	Published - Jul 2010

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1016/j.jet.2009.10.016

Cite this

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title = "Block recursive equilibria for stochastic models of search on the job",

abstract = "We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.",

author = "Guido Menzio and Shouyong Shi",

note = "Funding Information: ✩ We are grateful to an associate editor and an anonymous referee for comments. We have also received comments from participants at the Society for Economic Dynamics Meetings in New Orleans (2008), Cambridge (2008) and Istanbul (2009), the Society for the Advancement of Economic Theory (Ischia, Italy, 2009), the Yale Symposium on Search (2009), and at the macroeconomics seminars at Stanford, Penn State, Michigan, Georgetown, the Minneapolis FED, Philadelphia FED and Chicago FED. Discussions with Jim Albrecht, Pete Klenow, Narayana Kocherlakota, Dale Mortensen, Giuseppe Moscarini, Susan Vroman and Ronald Wolthoff led to significant improvements in the paper. Menzio gratefully acknowledges the financial support and the hospitality of the Hoover Institution. Shi gratefully acknowledges the financial support from the Bank of Canada Fellowship and from the Social Sciences and Humanities Research Council of Canada. The usual disclaimer applies. Copyright: Copyright 2010 Elsevier B.V., All rights reserved.",

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AU - Shi, Shouyong

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N2 - We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.

AB - We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.

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Block recursive equilibria for stochastic models of search on the job

Abstract

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