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Federal Reserve Bank of San Francisco
Working Paper Series
Efficiency in Sequential Labor and Goods Markets
Nicolas Petrosky-Nadeau
Etienne Wasmer
Philippe Weil
Abstract

This paper studies the optimal sharing of value added between consumers, producers, and labor. We first define a constrained optimum. We then compare it with the decentralized allocation. They coincide when the price maximizes the expected marginal revenue of the firm in the goods market, an outcome of the competitive search equilibrium, and when the wage exactly offsets the congestion externality of firm entry in the labor market, which is the traditional Hosios condition. Under price and wage bargaining, this allocation is achieved under a double Hosios condition combining the logic of competitive search and Hosios efficiency. The consumer receives a share of the goodsmarket trading surplus equal to the amount of externality occasioned by its search activity and the worker receives a share of the labor match surplus to offset the externality of firm entry in the matching process. A calibration of the model to the US economy indicates that the labor market is near efficient, and free-entry of consumers leads to excess excess consumer market power in setting prices. Restoring efficiency leads to a modest change in welfare.


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Nicolas Petrosky-Nadeau & Etienne Wasmer & Philippe Weil, Efficiency in Sequential Labor and Goods Markets, Federal Reserve Bank of San Francisco, Working Paper Series 2018-13, 27 Sep 2018.
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DOI: 10.24148/wp2018-13
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