Model specification - search and matching model, Managerial Economics

Model Specification 

We proceed with the model specification in the following steps.

1)  The economy is composed of competitive firms (F  in number) and identical workers  (N  in  number).  In  each  discrete time  period a fraction  6 of  the employed  is  laid  off  and joins the  unemployment pool.  The  fraction  6  is called the  'rate of separation'  in  the literature. Firms hire workers from the pool, not directly  from other firms. 

2)  The marginal  cost of  hiring  for each  firm is an increasing  fimction of its level of hiring. This captures the  idea that a high rate of hiring may  force firms to increase their  search intensity  or,  in  a more general model with heterogeneous workers,  to  accept poor matches between workers and jobs. The marginal cost is also a decreasing function of aggregate unemployment -  high aggregate unemployment makes it easier and cheaper for the firm to find willing and competent workers. 

3)  Since each firm chooses the rate of hiring by  equating the marginal  cost of hiring to the net marginal benefit of hiring,  it  is important to-determine,  in the model, the marginal benefit of hiring to the firm. Assuming a firm to be risk neutral, the marginal value to the firm of a worker hired in this period is the expected present value of his marginal product so long as  he works with the firm.  The marginal value, denoted by q,, is therefore an infinite sum of discounted  marginal  productivities  from  the  present period onwards to infinity. Two discounting factors are used  on  each term:  one, as usual, to take account of  time and the other to take account of the probability that a given worker will have left the job by time (t + i). 

4)  The net marginal benefit of hiring is equal to this marginal value minus the discounted present value  of wages  to be paid  to the worker who  is newly hired. It is in the spirit of search and matching models to assume that there is no labour market in which the wage is set -job  matches require an explicit search  process. The wage  is  set through bargaining  so  as  to  divide  the surplus from the job  between the worker and the firm. To simpli'fy matters, it is assumed in the present model that the worker experiences neither costs nor  benefits from unemployment, so that the  total  surplus from  the job is just the marginal value determined in paragraph 3 above. It  is assumed that the worker obtains a share 5 of the surplus and the firm gets (1 -  6)  with the size of 5 reflecting the bargaining power of  the worker. Thus the marginal benefit of hiring to the firm is given as a fraction of  the marginal value qt: 


5)  Each  firm chooses the rate of hiring, h,, by equating the marginal benefit of hiring specified  in  paragraph  4  above  with  the  marginal  cost of hiring determined in paragraph 2 above 

Posted Date: 10/26/2012 6:24:53 AM | Location : United States

Related Discussions:- Model specification - search and matching model, Assignment Help, Ask Question on Model specification - search and matching model, Get Answer, Expert's Help, Model specification - search and matching model Discussions

Write discussion on Model specification - search and matching model
Your posts are moderated
Related Questions
The individual and market demand curves The quantities and prices in the demand schedule can be plotted on a graph. Such a graph after the individual demand schedule is called

how to solve problems using derivatives ?

Diminishing Marginal Utility Diminishing marginal utility as well is to be held responsible for the rise in demand for a product when its price declines. When an individual pur

NATIONAL INCOME AND STANDARDS OF LIVING Standard of living refers to the quantity of goods and services enjoyed by a person. These goods may be provided publicly, such as in t

THE GOVERNED ECONOMY The governed economy contains central authorities often simply called "the government" - who levy taxes on firms and households and which engages in numer

Consumer Demand is how much of something that consumers are wanting. A company requires to know the consumer demand so they know how much of a product to build.

In the city of Gelato the market for ice cream is perfectly competitive. Aggregate demand for ice cream is: where p is the price for one cone of ice cream. All ice cream pr

Economics has two major branches: (1) micro economics, and (2) both micro and macro economics theories. The parts of micro and macro economics that constitute managerial economics

Fall in Supply When the supply falls, the supply curve shifts to the left to position S 1 S 1 .  At the initial equilibrium price P 1 , quantity supplied falls from q 1