DP14630 Volatile Hiring: Uncertainty in Search and Matching Models
Author(s): | Wouter Den Haan, Lukas Freund, Pontus Rendahl |
Publication Date: | May 2020 |
Date Revised: | December 2020 |
Keyword(s): | Option value, search frictions, uncertainty, unemployment |
JEL(s): | E24, E32, J64 |
Programme Areas: | Monetary Economics and Fluctuations |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=14630 |
In search-and-matching models, the nonlinear nature of search frictions increases average unemployment rates during periods with higher volatility. These frictions are not, however, by themselves sufficient to raise unemployment following an increase in perceived uncertainty; though they may do so in conjunction with the common assumption of wages being determined by Nash bargaining. Importantly, option-value considerations play no role in the standard model with free entry. In contrast, when the mass of entrepreneurs is finite and there is heterogeneity in firm-specific productivity, a rise in perceived uncertainty robustly increases the option value of waiting and reduces job creation.