Abstract We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two non-employment spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.

We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection.Principals (e.g.employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms.Agents (e.g.workers, or asset holders) have private information about the potential gains from trade.Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions.We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents.We then present a series of applications, including models of signaling, insurance, and lemons.These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.

We develop a linear GMM estimator of the discrete-time mixed proportional hazard (MPH) model of duration with an arbitrary distribution of unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring. We prove our estimator is consistent and apply it to the duration of price spells. We find substantial unobserved heterogeneity with economically meaningful implications for the response of output to a monetary policy shock in a model with time-dependent pricing rules and for the degree of state dependence in a model of price plans. (JEL C24, C41, E23, E31, E52, L11)

We survey the literature on search-theoretic models of the labor market. We show how this approach addresses many issues, including the following: Why do workers sometimes choose to remain unemployed? What determines the lengths of employment and unemployment spells? How can there simultaneously exist unemployed workers and unfilled vacancies? What determines aggregate unemployment and vacancies? How can homogeneous workers earn different wages? What are the tradeoffs firms face from different wages? How do wages and turnover interact? What determines efficient turnover? We discuss various modeling choices concerning wage determination and the meeting process, including recent models of directed search.

Abstract We study a model of over-the-counter trading in which ex ante identical traders invest in a contact technology and participate in bilateral trade. We show that a rich market structure emerges both in equilibrium and in an optimal allocation. There is continuous heterogeneity in market access under weak regularity conditions. If the cost per contact is constant, heterogeneity is governed by a power law and there are middlemen, market participants with unboundedly high contact rates who account for a positive fraction of meetings. Externalities lead to overinvestment in equilibrium, and policies that reduce investment in the contact technology can improve welfare. We relate our findings to important features of real-world trading networks.

Abstract For an incompatible patient–donor pair, kidney exchanges often forbid receipt-before-donation (the patient receives a kidney before the donor donates) and donation-before-receipt, causing a double-coincidence-of-wants problem. We study an algorithm, the Unpaired kidney exchange algorithm, which eliminates this problem. In a dynamic matching model, we show that the waiting time of patients under Unpaired is close to optimal and substantially shorter than under widely used algorithms. Using a rich administrative dataset from France, we show that Unpaired achieves a match rate of 63% and an average waiting time of 176 days for transplanted patients. The (infeasible) optimal algorithm is only slightly better (64% and 144 days); widely used algorithms deliver less than 40% match rate and at least 232 days waiting times. We discuss a range of solutions that can address the potential practical incentive challenges of Unpaired. In particular, we extend our analysis to an environment where a deceased donor waitlist can be integrated to improve the performance of algorithms. We show that our theoretical and empirical comparisons continue to hold. Finally, based on these analyses, we propose a practical version of the Unpaired algorithm.

Report: Ad Hoc Search Committee for the Editor of the American Economic Journal: Economic Policy by David Cutler, Amy Finkelstein, Adriana Lleras-Muney, James Poterba, David Romer and Robert Shimer. Published in volume 103, issue 3, pages 774 of American Economic Review, May 2013