Market Power and Efficiency in a Search Model

Manolis Galenianos, Philipp Kircher, Gabor Virag

Research output: Contribution to journalArticlepeer-review

Abstract

We build a theoretical model to study the welfare effects and policy implications of firms' market power in a frictional labor market. The main characteristics of our environment are that wages play a role in allocating labor across firms and the number of agents is finite. The decentralized equilibrium is inefficient and the firms' market power results in the misallocation of workers from the high to the low productivity firms. A minimum wage exacerbates the inefficiencies by forcing the low-productivity firms to increase their wage. Moderate unemployment benefits can increase welfare by improving the workers' outside option.

Original languageEnglish
Pages (from-to)85-103
Number of pages19
JournalInternational Economic Review
Volume52
Issue number1
DOIs
Publication statusPublished - Feb 2011

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