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Unformatted text preview: ECO 475 HW6 Solution Joon Song Oct 21, 2009 1. Simple Job Search Model A Let V ( w ) be a value of an unemployed worker with an o/er of w at hand, and W = [ w ; w ] be a support of F . Then V ( w ) = max & V E ( w ) ;V U , (1) where V E ( w ) = w + & (1 & ) V E ( w ) + V U (2) V U = b + & Z V ( w ) dF ( w ) . (3) From (2) , V E ( w ) = w + &V U 1 & & (1 & ) , (4) and thus V ( w ) = max w + &V U 1 & & (1 & ) ;V U . (5) Since V E ( w ) is strictly increasing with w , an unemployed worker&s policy follows a reservation rule: w A R + &V U 1 & & (1 & ) = V U V U = w A R 1 & & . (6) Therefore, V ( w ) = max w + &V U 1 & & (1 & ) ;V U = max (1 & & ) w + &w A R (1 & & ) [1 & & (1 & )] ; w A R 1 & & = 1 (1 & & ) [1 & & (1 & )] max & (1 & & ) w + &w A R ; (1 & & ) w A R + &w A R = 1 1 & & (1 & ) max & w;w A R + &w A R (1 & & ) [1 & & (1 & )] . (7) 1 By (3) , (6) , and (7) , w A R 1 & & = b + & Z & 1 1 & & (1 & ) max w;w A R + &w A R (1 & & ) [1 & & (1 & )] dF ( w ) = b + & 1 & & (1 & ) Z max w;w A R dF ( w ) + & 2 w A R (1 & & ) [1 & & (1 & )] ) w A R = 1 & & (1 & ) 1 + & b + & 1 + & Z max w;w A R dF ( w ) . (8) (1) T ( ) is a contraction. Let x;y 2 W . Without loss of generality (WLOG), x y . Then, j T ( y ) & T ( x ) j = & 1 + & Z max f y;w g dF ( w ) & Z max f x;w g dF ( w ) = & 1 + & Z w & x ( y & x ) dF ( w ) + Z x & w & y ( y & w ) dF ( w ) & 1 + & Z ( y & x ) dF ( w ) = & 1 + & j y & x j . Therefore, T ( ) is a contraction with modulus & 1+ & < 1 (by assuming & 2 (0 ; 1) ). Note that we also need restrictions on parameters so that T ( W ) W , which amounts to T ( w ) 2 W and T ( w ) 2 W due to monotonicity of T : 1 & & (1 & ) 1 + & b + &E ( w ) 1 + & w 1 & & (1 & ) 1 + & b + & 1 + & w w i.e. w + & 1 & & (1 & ) [ w & E ( w )] b w . Since ( W ; jj ) is a complete metric space and T is a contraction, by the contraction mapping theorem, w A R exists and is unique in W . Model B Let V ( w ) be a value of an unemployed worker with an o/er of w at hand, and W = [ w ; w ] be a support of F . Then V ( w ) = max V E ( w ) ;V U , (9) where V E ( w ) = w + & (1 & ) Z max V E ( w ) ;V E ( w ) dF ( w ) + V U (10) V U = b + & Z V ( w ) dF ( w ) . (11) 2 From (10) , we know that V E ( w ) is strictly increasing with w (Why?). Thus, an unemployed worker&s policy follows a reservation rule: V U = w B R + & & (1 & ) Z max V E w B R ;V E ( w ) dF ( w ) + V U = w B R + & & (1 & ) Z max V U ;V E ( w ) dF ( w ) + V U = w B R + & & (1 & ) Z V ( w ) dF ( w ) + V U . (12) By (11) and (12) , V U = w B R & (1 & ) b (1 & & ) . (13) Moreover, by (10) and (12) , V E ( w ) & V U = w & w B R + & (1 & ) Z max V E ( w ) ;V E ( " ) & max V U ;V E ( " )...
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This note was uploaded on 09/06/2011 for the course ECO 475 taught by Professor Hong during the Fall '07 term at Rochester.
 Fall '07
 Hong

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