The importance of search frictions in labor markets has long been recognized in the literature. In recent years,
search models have become the subject of renewed scrutiny. A series of papers has cast doubt on the ability of the
standard Mortensen-Pissarides model to account for business cycle fluctuations, observed wage dispersion as well
as long-run correlations between growth and unemployment. Given these numerous challenges, many observers
expect search models to undergo fundamental changes in coming years. I modestly hope to contribute to these
developments by devising models where search frictions are combined with imperfect competition and incomplete
markets.
Cross-country studies document a significantly positive correlation between unemployment and regulations that
distort competition in product markets. The Mortensen-Pissarides model is not suited to the analysis of this
relationship because it assumes that product markets are perfectly competitive. Introducing market power raises
difficult analytical questions which are still imperfectly understood. My work in this area attempts to overcome
these problems in order to devise a unifying framework for the analysis of employment flows and industry
dynamics.
The line of research on incomplete markets is motivated by the overwhelming evidence that workers cannot
perfectly insure against labor income risk. This salient feature of labor markets suggests that it is important to relax
the assumption of full insurance. My project is to use stochastic calculus to analyze the design of optimal
employment contracts. By applying recently developed mathematical techniques, I expect to derive analytical
solutions and, most interestingly, to characterize optimal contracts when income shocks are persistent. I hope that
this research will foster the integration of important features such as risk aversion, imperfect monitoring and
unobservable savings into equilibrium models of the labor market.