Title

What do Information Frictions do?

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

10-2005

Journal or Book Title

Economic Theory

Volume

26

First Page or Article ID Number

651

Last Page

675

DOI

10.1007/s00199-004-0518-0

Abstract

Researchers have incorporated labor or credit market frictions in isolation within simple neoclassical models to open up a role for institutions, inject realism into their models and examine the impact of these distortions on output and employment. We present an overlapping generations model with production in which a labor market friction (moral hazard) coexists with a credit market friction (costly state verification). The simultaneous presence and interaction of these two frictions is studied. Our main results are: (i) while credit market frictions affect real activity and employment both in the short and long run, labor market frictions typically have only short-run effects unless they also affect the volume of investment per worker, (ii) the two frictions amplify each other to produce higher longrun unemployment than would result from only labor market frictions, (iii) these distortions have the ability to prolong the effect of temporary shocks, and (iv) the dynamical properties of economies with both frictions are, somewhat surprisingly, qualitatively similar to their frictionless counterparts.

JEL Classification

E13, E24, O41, O17

Comments

This is a working paper of an article published as Bhattacharya, J., Chakraborty, S. What do information frictions do?. Economic Theory 26, 651–675 (2005). doi:10.1007/s00199-004-0518-0. Posted with permission.

Copyright Owner

Springer-Verlag

Language

en

File Format

application/pdf

Published Version

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