Market power and efficiency in a search model

Galenianos, Manolis, Kircher, Philipp and Virag, Gabor (2011) Market power and efficiency in a search model. International Economic Review, 52 (1). pp. 85-104. ISSN 0020-6598

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Abstract

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the highto the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.

Item Type:	Article
Official URL:	http://www.wiley.com/bw/journal.asp?ref=0020-6598
Additional Information:	© 2011 John Wiley & Sons, Inc.
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	J - Labor and Demographic Economics > J0 - General J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J63 - Turnover; Vacancies; Layoffs
Date Deposited:	20 Oct 2010 08:29
Last Modified:	13 Sep 2024 22:59
URI:	http://eprints.lse.ac.uk/id/eprint/29706

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