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On the Optimality of Search Matching Equilibrium When Workers Are Risk Averse
Author(s) -
LEHMANN ETIENNE,
VAN DER LINDEN BRUNO
Publication year - 2007
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2007.00335.x
Subject(s) - unobservable , economics , matching (statistics) , microeconomics , order (exchange) , wage , unemployment , comparative statics , marginal utility , tax rate , search cost , econometrics , labour economics , monetary economics , macroeconomics , finance , statistics , mathematics
This paper revisits the normative properties of search‐matching economies when homogeneous workers have concave utility functions and wages are bargained over. The optimal allocation of resources is characterized first when information is perfect and second when search effort is not observable. In the former case, employees should be unable to extract a rent. The optimal marginal tax rate is then 100%. As search effort becomes unobservable, an appropriate positive rent is needed and the optimal marginal tax rate is lower. Moreover, the pretax wage is lower in order to boost labor demand. Finally, in both cases, nonlinear income taxation is a key complement to unemployment insurance.