Working Papers
By Year:
Paper #  Author  Title  

17018 
Kenneth Burdett Guido Menzio 
The (Q,S,s) Pricing Rule: A Quantitative Analysis  
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 nondegenerate 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 shortcircuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and pricechange distributions. The calibrated model implies that search frictions are the main source of nominal price
stickiness. Download Paper


13024 
Kenneth Burdett Guido Menzio 
"(Q, S, s) Pricing Rules"  
We study the effect of menu costs on the pricing behavior of sellers and on the crosssectional distribution of prices in the searchtheoretic 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 buyerâ€™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 sellerspecific shocks. Download Paper


03030 
Kenneth Burdett Ricardo Lagos Randall Wright 
"An OntheJob Search Model of Crime, Inequality, and Unemployment"  
We extend simple searchtheoretic models of crime, unemployment and inequality to incorporate onthejob search. This is valuable because, lthough the simple models can be used to illustrate some important points concerning the economics of crime, onthejob 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 anticrime policies. Download Paper


03029 
Kenneth Burdett Ricardo Lagos Randall Wright 
"Crime, Inequality, and Unemployment", Second Version: September 2003  
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 anticrime policies like changing jail sentences, as well as more traditional labor market policies like changing unemployment insurance. Download Paper


02038 
Kenneth Burdett Ricardo Lagos Randall Wright 
"Crime, Inequality, and Unemployment  
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 viceversa; 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 anticrime policies, such as changes in apprehension rates or jail sentences, as well as more traditional labor market policies such as unemployment insurance. Download Paper


02037 
Kenneth Burdett Ryoichi Imai Randall Wright 
"Unstable Relationships"  
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 selffulfilling 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 jobtojob transitions. Download Paper


99003 
Kenneth Burdett Alberto Trejos Randall Wright 
"Cigarette Money"  
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
