Working Paper: CEPR ID: DP14630
Authors: Wouter den Haan; Pontus Rendahl; Lukas Freund
Abstract: 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.
Keywords: uncertainty; search frictions; unemployment; option value
JEL Codes: E24; E32; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in perceived uncertainty (D89) | higher unemployment rates (J64) |
| Nash bargaining assumption (C72) | higher unemployment rates (J64) |
| higher volatility does not directly cause job creation to decrease without Nash bargaining assumption (J69) | decrease in job creation (J23) |
| nonlinearities in matching function alone do not generate option value of waiting without Nash bargaining assumption (C78) | option value of waiting (J22) |
| anticipation of uncertainty (D84) | decline in firm value (G33) |
| anticipation of uncertainty (D84) | increase in unemployment (J64) |
| firm heterogeneity in productivity allows emergence of option-value channel (D29) | postponement of job creation (J68) |
| increase in future uncertainty (D84) | postponement of job creation (J68) |