Benchmark Search Model: Neutrality

In this chapter I develop a benchmark search model. A representative firm allocates workers between two activities: production and recruiting. Recruiters enable the firm to attract more workers, while producers generate revenue by creating a consumption good. There is no capital in the model, so production uses only labor and equilibrium savings are zero. Employed workers are periodically hit by shocks that leave them unemployed, while unemployed workers find jobs when they contact a recruiter. Workers’ preferences are additively separable over time and between consumption and leisure, and they are consistent with balanced growth. A government levies a labor income tax and rebates the proceeds as a lump sum ...

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