Incentives in competitive search equilibrium

This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions

Incentives in Competitive Search Equilibrium

This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions.Private information, incentives, search, unemployment, wage rigidity

Equilibrium Incentive Contracts

We study a labour market in which firms can observe workers’ output but not their effort, and in which a worker’s productivity in a given firm depends on a worker-firm specific component, unobservable for the firm. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn create unemployment. We show that the incentive power of the equilibrium wage contract is constrained socially efficient in the absence of unemployment benefits. We then apply the model to explain the recent increase in performance-pay contracts. Within our model, this can be explained by three different factors: (i) increased importance of non-observable effort, (ii) a fall in the marginal tax rate, (iii) a reduction in the heterogeneity of workers performing the same task. The likely effect of all three factors is an increase in the equilibrium unemployment rate.Incentives; Contracts; Unemployment; efficiency

Does poaching distort training?

We analyse the efficiency of the labour market outcome in a competitive search equilibrium model with endogenous turnover and endogenous general human capital formation. We show that search frictions do not distort training decisions if firms and their employees are able to coordinate efficiently, for instance, by using long-term contracts. In the absence of efficient coordination devices there is too much turnover and too little investments in general training. Nonetheless, the number of training firms and the amount of training provided are constrained optimal, and training subsidies therefore reduce welfare.Matching; Training; Poaching; Efficiency

Performance pay and adverse selection

We study equilibrium wage contracts in a labour market with adverse selection and moral hazard. Firms offer incentive contracts to their employees to motivate them to exert effort. Providing incentives comes, however, at a cost, as it leads to misallocation of effort across tasks. With ex ante identical workers, the optimal wage contract is linear, and the equilibrium resource allocation optimal. With ex ante heterogenous workers, firms may increase the incentive power of the wage contract to attract the better workers. The resulting equilibrium is separating, in the sense that workers self-select on contracts. Furthermore, the contracts offered to the good workers are too high powered compared to the contracts that maximise welfare.-

Designing Competition in Health Care Markets

In this paper we propose a simple, market based mechanism to set prices in health care markets, namely a system where the patients are auctioned out to the hospitals. Our aim is to characterize principles as to how such an auction should be designed. In the case of elective treatment, health authorities thus organize a competition between hospitals. The hospital with the lowest price signs a contracts with authority (or the insurer) that commits him to treat a given number of patients within a predetermined period. However, this is not a simple mechanism that identi…es the hospital with the lowest treatment cost. Due to potentially rapid and unpredictable shifts in demand, treatment capacity may be hard to know in advance. There is always a risk that treatment must be canceled due to arrival of patients that require acute treatment. This calls for a market design that accounts for the risk of default. Our main result is that the expected cost for the government is reduced if the government chooses to ”subsidize” default. This could be thought of as a system in which the government buys treatment in the spot market in the case of default, and let the hospital pay a default fee that is lower than the spot price. The reason why this reduces expected costs for the government is that the e¤ect on the bids is asymmetric: The second lowest bid is on average reduced more than the winning bid. Hence, the winner’s profit tends to shrink. This is due to what we characterize an endogenous correlation. Since the cost of treatment increases in the default risk (as the hospital must pay a penalty if it defaults), high cost hospitals typically have larger default risks than low costs hospitals.Health care markets; health care; hospitals; competition

Essays on matching models of the labour market.

This thesis is divided into three parts, all related to matching models of the labour market. In the first part, I analyze wage determination in search equilibrium. In the second part, I study human capital acquisition and depreciation when the labour market contains frictions. In the last part, I discuss various issues related to search and matching. Below follows a brief description of each paper. Part 1: Wage Determination In A Matching Model with Wage Announcement, I study a matching model where heterogeneous firms publicly announce wage offers. I derive a Walrasian type of equilibrium, which is constrained efficient. In Bargaining Over the Business Cycle, I assume that wages are determined by strategic bargaining. This makes wages more and unemployment less volatile than when the conventional Nash solution is applied. In Bargaining and Matching, I design an alternative extensive form bargaining game, where a third agent may arrive and Bertrand competition take place. The resulting wage schedule is of the same form as the one that prevails from Nash bargaining. Part 2. Human Capital and Matching In Human Capital Investments and Market Imperfections, I analyze how frictions in the labour market can distort the incentives to invest in human capital, and lead to sub-optimal investments and multiple equilibria. In Education and Competition for Jobs, each vacancy can get more than one applicant, and several workers may compete for the same job. Depending on parameter values, workers may or may not diversify and choose different levels of education. In Loss of Skills During Unemployment, workers gradually lose skills during unemployment. As a result, multiple equilibria may exist, and unemployment benefits to the long-term unemployed can reduce unemployment. Part 3. Other Topics In Optimal Unemployment, I study the efficiency of matching models using techniques from optimal control theory. In A Search Model with Hiring Costs, I introduce hiring costs in the model, and show that this makes the vacancy rate less volatile and the adjustment process after a shock smoother