Labor_Nobel_background

Labor_Nobel_background - 11 OCTOBER 2010 Scientific...

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Unformatted text preview: 11 OCTOBER 2010 Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2010 MARKETS WITH SEARCH FRICTIONS compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences THE ROYAL SWEDISH ACADEMY OF SCIENCES has as its aim to promote the sciences and strengthen their influence in society. BOX 50005 (LILLA FRESCATIVGEN 4 A), SE-104 05 STOCKHOLM, SWEDEN TEL +46 8 673 95 00, FAX +46 8 15 56 70, INFO@KVA.SE HTTP : //KVA.SE Markets with Search Frictions 1 Introduction Most real-world transactions involve various forms of impediments to trade, or frictions. Buyers may have trouble nding the goods they are looking for and sellers may not be able to nd buyers for the goods they have to oFer. These frictions can take many forms and may have many sources, including worker and rm heterogeneity, imperfect information, and costs of transportation. How are market outcomes inuenced by such frictions? That is, how should we expect prices to form andgiven that markets will not clear at all points in timehow are quantities determined? Do these frictions motivate government intervention? These questions are perhaps particularly pertinent in the labor market where costly and time-consuming transactions are pervasive and where the quantity determination may result in unemployment: some workers will not nd job openings or their applica- tions will be turned down in favor of other workers. This years Prize is awarded for fundamental contributions to search and matching theory. This theory oFers a framework for studying frictions in real-world transactions and has led to new insights into the workings of markets. The development of equilibrium models featuring search and matching started in the early 1970s and has subsequently developed into a very large literature. The Prize is granted for the closely related contribu- tions made by Peter Diamond, Dale Mortensen, and Christopher Pissarides. These contributions include the analysis of price dispersion and eciency in economies with search and matching frictions as well as the development of what has come to be known as the modern search and matching theory of unemployment. The research of Diamond, Mortensen and Pissarides focuses on specic frictions due to costly search and pairwise matching, i.e., the explicit di- culties buyers and sellers have in locating each other, thereby resulting in failure of markets to clear at all points in time. Buyers and sellers face costs in their attempts to locate each other (search) and meet pairwise 1 when they come into contact (matching). In contrast, standard market descriptions involve a large number of participants who trade at the same time. Access to this marketplace and all the relevant information about it is costlessly available to all economic agents; in particular, all traders would trade at the same market price. One of the main issues, therefore, is howtrade at the same market price....
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Labor_Nobel_background - 11 OCTOBER 2010 Scientific...

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