DP5554 Incentives in Competitive Search Equilibrium and Wage Rigidity

Author(s): Espen R Moen , Asa Rosen

Publication Date: March 2006

Keyword(s): private information , search , unemployment , wage rigidity

JEL(s): E30 , J30 , J60

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP5554.asp

This paper examines competitive search equilibrium when workers' effort choice and 'type' are private information. We derive a modified Hosios Rule determining the allocation of resources, and analyze how private information influences the responsiveness of the unemployment rate to changes in macroeconomic variables. Most importantly, private information increases the responsiveness of the unemployment rate to changes in the general (type- and effort independent) productivity level. If the changes also affect the information structure, the responsiveness of the unemployment rate may be large, even if the changes in expected productivity are small.