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LEARNING OBJECTIVES: Upon completion of the course students should be able
• to describe and relate the problems of search and matching to various markets such as labor, marriage, household investments, savings and insurance, money and third party intermediation;
• to explain how market mechanisms (and also non-market mechanisms such as families and social networks) are related to search and matching decisions.
• to apply the main modeling tools used in the analysis of search and matching problems;
• to apply the models and theories covered during the course to analyze a variety of search and matching problems that confront individual decision makers as well as policy makers
• to evaluate and quantify some applied search and matching models using standard empirical techniques.
COURSE DESCRIPTION:
Search and matching problems are central to many economic questions regarding markets and social interactions. These questions range from figuring out the reasons for wage inequality to understanding why money is valued. Search and matching problems also introduce important trade-offs at the individual level - for example a woman might face a choice between a marriage with a less than ideal partner, in order to share the burden of early child rearing, or to wait for a better match with the associated costs of delaying her fertility. The decision to accumulate and develop firm specific human capital is a related (and much more market oriented) example.
REQUIRED COURSES (progression): BSc.oecon. or similar.
The Economics of Search and Matching is intended to be an optional, advanced-level M.Sc. course tailored to students in both Management and Economics, who are considering dissertation work in the general areas of education, finance, labor, family economics, network economics, organization economics, etc.
Students will benefit if they are familiar with intertemporal decision problems and the technique of dynamic programming, games of asymmetric information, human capital theory, bargaining problems, basic probability theory, microeconometrics, and regression analysis.
This courses takes its point of departure the methodologies developed in core courses in the microeconomics sequence such as game theory and/or Micro 1, and in the macroeconomics sequence such as Macro 1. The course is also open to PhD students. It is a complement to both PhD micro and macro, which give much coverage to equilibrium analysis and dynamic decision making. It is also a complement to the microeconometrics course, which gives more advanced and general coverage of how to estimate and test the existence of fixed effects and the hazard rates associated with duration models. Finally, it is a useful complement to those students who wish to expand the reach of some tools they develop in the labor economics course, which gives, in part, introductory coverage to the problem of search and simple matching models. This last point can also be said of Macro 2.
John Kennes
TEACHING METHOD: There will be 4 lecture hours a week for about 12 weeks. The students will (preferably in groups of 2 - 3) work on an assignment with a view to producing a written report. The assignment will depart from material covered in the lectures, and the report is limited to 15 pages per student. Student presentation of class materials will also be encouraged as a means to preparing for the oral exam.
English
A. Descriptive statistics
1) Duration analysis and estimation
2) AKM estimation
Kiefer, Nicholas M. (1988) Economic Duration Data and Hazard Functions, Journal of Economic Literature, Vol. 26, No. 2 (Jun., 1988), pp. 646-679
Abowd, J., F. Kramarz, and D. Margolis (1999), High-Wage Workers and High-Wage Firms, Econometrica, 67, 2, 251-333.
B. Matching models
Three simple models of matching
1) The Mortensen model
2) The Becker model
3) The Gale-Shapely model
D. Gale and L. S. Shapley (1962) "College Admissions and the Stability of Marriage", American Mathematical Monthly 69, 9-14.
Becker, Gary S, (1973). "A Theory of Marriage: Part I," Journal of Political Economy, vol. 81(4), pages 813-46, July-Aug.
Mortensen, Dale (2003) Wage Dispersion: Why are similar workers paid differently?, MIT press. (Chapter 1)
C. Dynamic decision theory
We will solve the following problems using numerical techniques and dynamic programming
1) An optimal stopping rule
2) The cake eating problem
Adda, Jerome and Russel Cooper (2003) Dynamic Economics: Quantitative Methods and Applications, MIT press. (Chapters 2 and 3 pp 7-60, chapter 10 pp 257-262)
D. Introduction to bargaining
1) The Nash bargaining solution,
2) The Rubinstein bargaining game
Abhinay Muthoo, 2000. "A Non-technical Introduction to Bargaining Theory," World Economics, vol. 1(2), pages 145-166, April.
E. Search and matching models of the labor market
1) The Pissarides-Mortensen model
2) Burdett-Mortensen model
3) The Shimer puzzle
4) Productivity and wage dispersion
Pissarides, Christopher (2000) Equilibrium Unemployment Theory, MIT press 2nd Edition (chapters 1 and 4)
Burdett, Ken and Dale Mortensen "Wage differentials, employer size and unemployment", International Economic Review (May 1998) 39: 257-273.
Mortensen, Dale and Christopher Pissarides ``Job creation and job destruction in the thoery of unemployment, Review of Economic Studies, 1994.
Shimer, Robert 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, vol. 95(1), pages 25-49, March.
Postel-Vinay, Fabian & Jean-Marc Robin, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," Econometrica, vol. 70(6), pages 2295-2350.
Julien, Benoit, John Kennes and Ian King (2006) Residual Wage Disparity and Coordination Unemployment, International Economic Review
F. Search and matching models of the marriage market
1) Marriage and fertility
2) Marriage and divorce
3) Assortative matching
Mortensen, Dale (1988) "Matching: finding a partner for life or otherwise", American Journal of Sociology 94,
Browning, Chiapori and Weiss (2009) Economics of the Family (textbook draft), chapter 10 on marriage and fertility.
Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, vol. 68(2), pages 343-370, March.
Kennes, John and John Knowles (2010) Step-families: An equilibrium analysis.
G. Search and matching models of monetary exchange
1) The Kiyotaki and Wright model
2) The Trejos and Wright model
3) The Lagos and Wright model
Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, vol. 97(4), pages 927-54, August.
Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money and Prices," Journal of Political Economy, vol. 103(1), pages 118-41, February
Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, vol. 113(3), pages 463-484, June.
Julien, Benoit, John Kennes and Ian King (2008) Bidding for Money, Journal of Economic Theory
H. Additional topics
1) Social networks
2) Informational intermediation
3) Housing markets
4) Crime and unemployment
Montgomery, J.D. (1991). "Social Networks and Labor-Market Outcomes: Toward an Economic Analysis," American Economic Review, 81 (Dec.): 1408-18.
Albrecht, James & Gautier, Pieter & Vroman, Susan, 2009. "Directed Search in the Housing Market," IZA Discussion Papers 4671, Institute for the Study of Labor (IZA).
Kenneth Burdett & Ricardo Lagos & Randall Wright, 2003. "Crime, Inequality, and Unemployment," American Economic Review, vol. 93(5), pages 1764-1777, December.
Kennes and Schiff (2008) Quality Infomediation in Search Markets, International Journal of Industrial Organization
Reading are expected to amount to approximately 800 pages.
FORM OF ASSESSMENT: Oral exam without preparation based partly on the project report and the in class presentation (30 mins.). In the final grading, the weight of the oral exam is ½ and the weight of the project report is ½.
EXAMINATION AIDS ALLOWED: Only the project report and in class presentation slides
