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Block Recursive Equilibria for Stochastic Models of Search on the Job

We develop a general stochastic model of directed search on the job. Directed search allows us to focus on a Block Recursive Equilibrium (BRE) where agents' value functions, policy functions and market tightness do not depend on the distribution of workers over wages and unemployment. We formally prove existence of a BRE under various specifications of workers' preferences and contractual environments, including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy as solving a representative agent model, in contrast to the analytical and computational difficulties in models of random search on the job.

Authors: 
Guido Menzio, University of Pennsylvania
Shouyong Shi, University of Toronto
Publication Date: 
January, 2010
HCEO Working Groups: 
Publication Type: 
Journal: 
Journal of Economic Theory
Volume: 
145
Issue Number: 
4
Pages: 
1453-1494
Document Number: 
R0083