A Tractable Model of Search on the Job and Aggregate Fluctuations
In this paper, we develop a tractable model of the labor market featuring on-the-job search and aggregate fluctuations.
Repeated Moral Hazard with Worker Mobility via Directed On-the-Job Search
I develop a model of dynamic employment contracts by integrating an optimal contracting problem into an equilibrium search framework. The proposed framework enables us to analyze the interaction between the contracting problem and the endogenously evolving outside environment via worker mobility, and I characterize the optimal long-term wage contract as well as the optimal incentive compatible effort-tenure profile. The optimal contract exhibits an increasing wage-tenure profile for two reasons: 1) it induces the workers to be more likely to stay in their current contracts, and 2) it can induce the workers to make efforts when the current up-front wages cannot. The optimal incentive-compatible effort also has an increasing profile due to an interaction between 1) the workers' fear of losing their jobs, and 2) their incentive to obtain better outside offers. I then show the existence of an equilibrium. The equilibrium inherits the ``block recursivity'' developed by Shi (2008) and Menzio and Shi (2008); that is, individuals' optimal decisions and optimal contracts are independent of the distribution of workers.
Competitive Search Equilibrium with Asymmetric Information
This paper explores the behavior of a model economy with search frictions and bilateral asymmetric information. Firms commit to employment contracts in an effort to attract workers. When a worker and firm meet, the worker must decide whether to supply effort to the employment relationship, thereby affecting the distribution of a match-specific productivity shock. Only the worker observes her effort choice and only the firm observes the realization of the shock. We prove that under a standard regularity condition, employment contracts take a simple form: the firm pays a wage w to a worker who is hired and a severance payment b to a worker who is dismissed. The firm hires the worker if her productivity exceeds w − b, while the gap between the wage and the severance payment is high enough to ensure that the worker supplies effort to the employment relationship. Asymmetric information unambiguously reduces the vacancy-unemployment ratio and reduces the probability that a meeting results in a match. These results are consistent with earlier findings in the implicit contracts literature, although the precise mechanism is somewhat different. For example, there is no risk-sharing motive in this framework; and mobility restrictions are explicitly caused by a primitive search friction.