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A Theory of Non-Coasean Labor Markets

Institute Working Paper 66 | Published March 10, 2023

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Andrés Blanco University of Michigan
Andrés Drenik University of Texas at Austin
Christian Moser Columbia University
Emilio Zaratiegui Columbia University
A Theory of Non-Coasean Labor Markets


We develop a theory of labor markets in a monetary economy with four realistic features: search frictions, worker productivity shocks, wage rigidity, and two-sided lack of commitment. Due to the non-Coasean nature of labor contracts, inefficient job separations occur in the form of endogenous quits and layoffs that are unilaterally initiated whenever a worker’s wage-to-productivity ratio moves outside an inaction region. We derive sufficient statistics for the aggregate labor market response to a monetary shock based on the distribution of workers’ wage-to-productivity ratios. These statistics crucially depend on the incidence of inefficient job separations, which we show how to identify using readily available microdata on wage changes and worker flows between jobs.