This paper develops a macroeconomic model that combines an incomplete‐markets overlapping‐generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non‐employed workers, and differences in match quality. With these ingredients, our model provides a joint microfoundation for the three main inputs in aggregate production: capital, employment, and labor efficiency. The calibrated model offers a good fit to the empirical age profiles of search activity, job‐finding rates, wages, and savings. We use the model to analyze the impact of tax and transfer policies for labor market dynamics and aggregate economic activity via capital, employment, and labor efficiency channels. Lower unemployment benefits and a less progressive tax schedule bring about welfare losses for a newborn worker which are mainly driven by higher consumption risk and costlier search effort; both policies have differential effects along the age, income, and wealth dimensions.
This study provides a new theoretical result that a decline in the long‐term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for antitrust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.
We develop a theory that rationalizes the use of a dominant unit of account in an economy.Agents enter into non-contingent contracts with a variety of business partners.Trade unfolds sequentially in credit chains and is subject to random matching.By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus.We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions.