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Federal Reserve Bank of Chicago
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Establishments dynamics and matching frictions in classical competitive equilibrium
Marcelo Veracierto
Abstract

This paper develops a Walrasian equilibrium theory of establishment level dynamics and matching frictions and uses it to evaluate the effects of congestion externalities in the matching process and determine the government interventions that are needed to implement a Pareto optimal allocation. The optimal policy, which involves a tax on the creation of help-wanted ads and an unemployment subsidy, is highly contractionary. However, it leads to large welfare gains. The policy also plays an important role in dampening the response of the economy to aggregate productivity shocks.


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Marcelo Veracierto, Establishments dynamics and matching frictions in classical competitive equilibrium, Federal Reserve Bank of Chicago, Working Paper Series WP-07-16, 2007.
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Keywords: Unemployment ; Business cycles ; Labor turnover
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