Presentation on theme: "Lecture 2: Frictional unemployment III. Endogeneizing job destruction."— Presentation transcript:
Lecture 2: Frictional unemployment III. Endogeneizing job destruction
Where are we? So far, exogenous job destruction rate s Makes it difficult to talk about institutions such as firing costs Can’t use the model to explain the cyclical behaviour of job destruction Can we extend it to make job destruction endogenous?
The Mortensen-Pissarides model 1 firm = 1 job Each jobs produces p+σε ε = idiosyncratic shock ε changes according to a Poisson process Arrival rate λ Drawn from distribution F(), ε < ε u New firms start at ε = ε u
The role of turnover costs: In the absence of turnover costs, free entry at the highest productivity level would drive down all firms such that ε < ε u out of the market Here, profitable to go on rather than repaying the hiring cost next time