Monopolistically Competitive Search Equilibrium (with Alan Finkelstein Shapiro).
This paper introduces a monopolistically-competitive recruiting (intermediated) market in a standard (non-intermediated) search and matching model to explore the implications of intermediated labor markets, whose importance in new job creation is rising. We analytically show that: (1) the surplus to recruiters from successful monopolistic intermediation appears directly and additively in the surplus-sharing condition between newly matched workers and firms; (2) the surplus that accrues to monopolistic recruiters arises due to aggregate increasing returns in matching; (3) deviations from efficient wage setting (Nash-Hosios) in non-intermediated random-search markets spill over into recruiter creation and matching via intermediated markets, but deviations from efficient matching aggregation in recruiting markets have no impact on non-intermediated markets; and (4) in general equilibrium, the aggregate increasing returns in matching expands the aggregate resource frontier. We quantitatively show how the implications of wage distortions in non-intermediated markets on aggregate unemployment and labor force participation depend on the existence of intermediated labor markets.
Anticipated Productivity and the Labor Market (with Ryan Chahrour and Tristan Potter).
We identify the main shock driving the covariance of the labor market and output. The shock induces business cycle patterns in output, consumption, investment, hours, and stock prices, and is orthogonal to business cycle fluctuations in TFP. Yet, the shock is associated with future TFP fluctuations, consistent with theories of technology news. A labor search model in which wages are determined by a cash flow sharing rule, rather than the present value of match surplus, matches the observed responses to TFP news. The response of the wage implied by this rule is consistent with a broad panel of wage series.
Optimal Fiscal Policy with Endogenous Product Variety (with Alan Finkelstein Shapiro and Fabio Ghironi).
We study Ramsey-optimal fiscal policy with endogenous product creation by forward-looking firms. Optimal policy balances monopoly incentives for entry with the welfare benefit of product variety. Using standard preferences over product variety, it is optimal to tax firms' dividend payments (which directly influences firm creation) in the long run. Over the cycle, optimal policy induces smaller, but efficient, fluctuations of capital and labor markets than in an economy with exogenous fiscal policy calibrated to U.S. data. Decentralization requires zero intertemporal distortions and constant static distortions. We relate our results to Ramsey theory by developing concepts of efficiency that take into account product creation and are therefore welfare-relevant.