COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1754 Stochastic Search Equilibrium Giuseppe Moscarini and Fabien Postel-Vinay February 2010 We analyze a stochastic equilibrium contract-posting model. Firms post
employment contracts, wages contingent on all payoff-relevant states. Aggregate
productivity is subject to persistent shocks. Both employed and unemployed workers search
randomly for these contracts, and are free to quit at any time. An equilibrium of this
contract-posting game is Rank-Preserving [RP] if larger firms offer a larger value to
their workers in all states of the world. We show that every equilibrium is RP, and
equilibrium is unique, if firms differ either only in their initial size, or also in their
fixed idiosyncratic productivity but more productive firms are initially larger, in which
case turnover is always efficient, as workers always move from less to more productive
firms. The RP equilibrium stochastic dynamics of firm size provide an explanation for the
empirical finding that large employers are more cyclically sensitive (Moscarini and
Postel-Vinay, 2009). RP equilibrium computation is tractable, and we simulate calibrated
examples. |
