Paper # Author Title
Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S,Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness. Download Paper
We study the effect of menu costs on the pricing behavior of sellers and on the cross-sectional distribution of prices in the search-theoretic model of imperfect competition of Burdett and Judd (1983). We find that, when menu costs are small, the equilibrium is such that sellers follow a (Q, S, s) pricing rule. According to a (Q, S, s) rule, a seller lets inflation erode the real value of its nominal price until it reaches some point s. Then, the seller pays the menu cost and changes its nominal price so that the real value of the new price is randomly drawn from a distribution with support [S,Q], where Q is the buyer’s reservation price and S is some price between s and Q. Only when the menu cost is relatively large, the equilibrium is such that sellers follow a standard (S; s) pricing rule. We argue that whether sellers follow a (Q, S, s) or an (S, s) rule matters for the estimation of menu costs and seller-specific shocks. Download Paper
We extend simple search-theoretic models of crime, unemployment and inequality to incorporate on-the-job search. This is valuable because, lthough the simple models can be used to illustrate some important points concerning the economics of crime, on-the-job search models are more relevant empirically as well as more interesting in terms of the types of equilibria they generate. We characterize crime decisions, unemployment, and the equilibrium wage distribution. We use quantitative methods to illustrate key results, including a multiplicity of equilibria with different unemployment and crime rates, and to discuss the effects of changes in labor market and anti-crime policies. Download Paper
There is much discussion of the relationships between crime, inequality, and unemployment. We construct a model where all three are endogenous. We find that introducing crime into otherwise standard models of labor markets has several interesting implications. For example, it can lead to wage inequality among homogeneous workers. Also, it can generate multiple equilibria in natural but previously unexplored ways; hence two identical neighborhoods can end up with different levels of crime, inequality, and unemployment. We discuss the effects of anti-crime policies like changing jail sentences, as well as more traditional labor market policies like changing unemployment insurance. Download Paper
There has been much discussion of the relationships between crime, inequality and unemployment. We construct a model where all three are endogenous. Introducing crime into otherwise standard models affects the labor market in several interesting ways. For example, we show how the crime rate affects the unemployment rate and vice-versa; how the possibility of criminal activity can lead to wage inequality among homogeneous workers; and how the possibility of crime can generate multiple equilibria in natural but previously unexplored ways. In particular, two fundamentally identical neighborhoods may easily end up with different levels of unemployment, inequality, and crime. The model can be used to study the equilibrium effects of anti-crime policies, such as changes in apprehension rates or jail sentences, as well as more traditional labor market policies such as unemployment insurance. Download Paper
We analyze models where agents search for partners to form relationships (employment, marriage, etc.), and may continue searching for different partners while matched. Matched agents are less inclined to search if their match yields more utility and if it is more stable. If one partner searches, the relationship is less stable, so the other is more inclined to search, potentially making instability a self-fulfilling prophecy. We show this can generate a multiplicity - indeed, a continuum - of steady state equilibria. In any equilibrium there tends to be too much turnover, unemployment, and inequality compared to the efficient outcome. A calibrated version of the model explains 1/2 to 2/3 of reported job-to-job transitions. Download Paper
We study the circumstances under which commodities emerge endogenously as media of exchange - the way cigarettes apparently did, for example, in POW camps - both when there is fiat money available and when there is not. We characterize how specialization, the degree of trading frictions, intrinsic properties of commodities, and the amount of fiat money available determine whether a commodity serves as money and its exchange value. In some equilibria, the exchange value of commodity money is pinned down by its consumption value; in others, it is not. The value of fiat money mayor may not be pinned down by that of commodity money, depending on circumstances. We also allow commodities to come in heterogeneous qualities and discuss the implications for Gresham's Law. Download Paper