Econ 366-Markets with Frictions
1. (25) Optimal Hiring Subsidy. Consider the labor market model of Pissarides (1985). Suppose that the only intervention of the government into the market is to pay a one-time subsidy H to Örms whenenver they succeed in hiring a worker.
a. Write down the conditions for the market tightness that maximizes welfare. Explain this condition.
b. Write down the equilibrium for the market tightness given the subsidy H and = 1. Explain this condition.
c. Find the optimal hiring subsidy H, as a function of the elasticity of the job-Önding probability p wrt and of the bargaining power of the worker .
d. Is the optimal hiring subsidy positive or negative when > 1 ? And when < 1 ? Explain your Öndings
DETAILED ASSIGNMENT
