Fields: Macroeconomics, Search Theory, Information Economics
My research addresses the impact of micro-frictions in the decentralized market on the macroeconomics of restructuring. In particular, I study how search friction and information friction may affect market functioning on both asset and labor market. For more detail, please check my recent working papers:
Adverse Selection and Liquidity Distortion in Decentralized Markets
Abstract: This paper studies the competitive equilibrium outcome in decentralized asset markets when both search friction and adverse selection play roles. In a dynamic environment with heterogeneous sellers and buyers, I show how adverse selection leads to the downward distortion of equilibrium market liquidity. The model predicts a strong link between the market liquidity and the underlying uncertainty stemming from adverse selection and therefore provides an explanation for the existence of massive illiquidity. As our setup captures two important dimensions in the trading market, price and liquidity, it shows how price and liquidity are jointly determined as an equilibrium outcome and further sheds lights on market segmentation. The framework also allows for a richer analysis of how sorting pattern is determined in such an environment and how different market segmentation may arise when sellers' motives for sale are unknown to the market.
Key words: Liquidity; Search frictions; Adverse selection; Over-the-Counter; Market segmentation
A Search Theory of Sectoral Reallocation
Abstract: The sectoral shock is often viewed as an exogenous shock to the matching efficiency in a search model in literature. We find this approach of describing structural change unsatisfying. This paper therefore contributes a theoretical framework to understand how the labor market responds differently to aggregate and sectoral shocks, when both search friction and imperfect mobility play roles. Both the steady state and dynamics in general equilibrium are characterized. The main result shows that if the TFP shock hits different sectors unequally, the need for reallocation results in a much more persistent dynamics, as implied by the standard model. This model therefore provides an explanation for the current observation of the coexistence of a high vacancy rate and a high unemployment rate. It further sheds light on an important question: how much unemployment can be attributed to a structural problem?