What do Information Frictions Do?

J. Bhattacharya, S. Chankraborty

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    Abstract

    Numerous researchers have incorporated labor or credit market frictions within simple neoclassical models to (i) facilitate quick departures from the Arrow-Debreu world, thereby opening up the role for institutions, (ii) inject some realism into their models, and (iii) explain cross country di.erences in output and employment.We present an overlapping generations model with production in which a labor market friction (moral hazard) coexists along with a credit market friction (costly state verification).The simultaneous presence and interaction of these two frictions is studied.We show that credit frictions have a multiplier effect on economic activity, by directly a.ecting investment and indirectly through the unemployment rate.The labor market friction, on the other hand, a.ects unemployment in the short- and long-run but has only a short-run effect on capital accumulation.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherMacroeconomics
    Number of pages34
    Volume2003-21
    Publication statusPublished - 2003

    Publication series

    NameCentER Discussion Paper
    Volume2003-21

    Keywords

    • information
    • labour market
    • employment
    • moral hazard
    • credit markets
    • unemployment

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    Bhattacharya, J., & Chankraborty, S. (2003). What do Information Frictions Do? (CentER Discussion Paper; Vol. 2003-21). Macroeconomics.