Guido Menzio
Assistant Professor in Economics
Research
Fields of
Interest
primary: Macroeconomics, Search
Theory
secondary: Contract Theory, Labor
Economics
Refereed Publications
“Inflation and Unemployment in the
Long Run,” with Aleksander Berentsen and Randall Wright, American Economic Review (Accepted).
We study the long-run
relation between money, measured by inflation or interest rates, and
unemployment. We first document in the data a positive relation between these
variables at low frequencies. We then develop a framework where unemployment
and money are both modeled using microfoundations
based on search and bargaining theory, providing a unified theory for analyzing
labor and goods markets. The calibrated model shows that money can account for
a sizable fraction of trends in unemployment. We argue it matters,
qualitatively and quantitatively, whether one uses monetary theory based on
search and bargaining, or an alternative ad hoc specification.
“Block Recursive Equilibria
for Stochastic Models of Search on the Job,” with Shouyong Shi, Journal of Economic Theory
(Forthcoming).
We develop a general
stochastic model of directed search on the job. Directed search allows us to
focus on a Block Recursive Equilibrium (BRE) where agents’ value functions,
policy functions and market tightness do not depend on the distribution of
workers over wages and unemployment. We formally prove existence of a BRE under
various specifications of workers’ preferences and contractual environments,
including dynamic contracts and fixed-wage contracts. Solving a BRE is as easy
as solving a representative agent model, in contrast to the analytical and
computational difficulties in models of random search on the job.
“A Theory of
Partially Directed Search,” Journal
of Political Economy, 115 (2007), 748-769.
This paper studies a search model of the
labor market where firms have private information about the quality of their vacancies,
they can costlessly communicate with unemployed workers before the beginning of
the application process, but the content of the communication does not
constitute a contractual obligation. At the end of the application process,
wages are determined as the outcome of an alternating offer bargaining game.
The model is used to show that vague non-contractual announcements about
compensation---such as those one is likely to find in help-wanted ads---can be
correlated with actual wages and can partially direct the search strategy of
workers.
Working Papers
“Efficient Search on the Job and the
Business Cycle,” with Shouyong Shi,
NBER Working Paper 14905, Revise and Resubmit at the Journal of Political Economy (September 2009).
We build a directed search model of the
labor market in which workers' transitions between unemployment, employment,
and across employers are endogenous. We prove the existence, uniqueness and
efficiency of a recursive equilibrium with the
property that the distribution of workers across employment states does not
affect the agents' values and strategies. Because of this property, we are able
to compute the equilibrium outside the non-stochastic steady-state. We use a
calibrated version of the model to measure the effect of productivity shocks on
the
“Directed Search on the Job and Aggregate Fluctuations,”
with Shouyong Shi, Manuscript (September
2009).
In this paper, we prove the existence of a Block Recursive
Equilibrium for a model of directed search on the job in which workers are
ex-ante heterogeneous with respect to some observable characteristic such as
education.
“Job Search with Bidder Memories,” with Carlos Carrillo-Tudela
and Eric Smith, IZA Working
Paper 4319, Submitted to the International
Economic Review (July 2009).
This paper
revisits the no-recall assumption in job search models with take-it-or-leave-it
offers. Workers who can recall previously encountered
potential employers in order to engage them in Bertrand bidding have a distinct
advantage over workers without such attachments. Firms account for this
difference when hiring a worker. When a worker first meets a firm, the firm
offers the worker a sufficient share of the match rents to avoid a bidding war
in the future. The pair share the gains to trade. In
this case, the Diamond paradox no longer holds.
“Worker Replacement,” with Espen
Moen, PIER Working Paper 08-040, Revise and Resubmit at the Journal of Monetary Economics (June
2009).
We consider a frictional labor market in which firms
want to insure their senior employees against income fluctuations and, at the
same time, want to recruit new employees to fill their vacant positions. Firms
can commit to a wage schedule, i.e. a schedule that specifies an employee’s
wage as function of his tenure and other idiosyncratic and aggregate
observables. However, firms cannot commit to the employment relationship with
any of their workers, i.e. firms can dismiss workers at will. We find that,
because of the firm’s limited commitment, the optimal schedule prescribes not
only a rigid wage for senior employees, but also a downward rigid wage for new
hires. Moreover, we find that, while the rigidity of the wage of senior workers
does not affect the allocation of labor, the rigidity of the wage of new hires
magnifies the response of unemployment and vacancies to negative shocks to the
aggregate productivity of labor.
“A Search Theory of Rigid Prices,”
PIER Working Paper 07-031, Under Revision for the Quarterly Journal of Economics (September 2007).
This paper studies price dynamics in a
product markets characterized by: (a) search
frictions—in the sense that it takes time for a buyer to find a seller that
produces a version of the good he likes; (b) anonymity—in the sense that sellers cannot price discriminate
between first-time buyers and returning costumers; (c) asymmetric information—in the sense that sellers are subject to
idiosyncratic shocks to their marginal cost of production and privately observe
the shocks’ realizations. I find that the joint dynamics of costs and prices
may be very different than in a standard Walrasian market. When shocks are
i.i.d., the price remains constant in the face of fluctuations in a seller’s
marginal cost. When shocks are moderately persistent, the price adjusts slowly
and imperfectly in response to changes in a seller’s cost. Finally, when shocks
are sufficiently persistent, the price adjusts instantaneously and efficiently
as soon as a seller’s production cost varies.
“A Cheap-Talk Theory of Random and Directed Search,”
Revised for the Journal of Political
Economy as “A Theory of Partially Directed Search”
(2006).
This paper studies a search model of the
labor market where firms have private information about the gains from trade
and post cheap-talk messages to advertise their vacancies before workers decide
which location to visit. The surplus of a match is divided ex-post according to
the outcome of an alternating-offer bargaining game of asymmetric information.
When this bargaining game is fast, I show that the maximum amount of
information that can be transmitted through the cheap-talk depends
non-monotonically on the tightness of the labor market. In particular, if the
ratio of unemployed workers to vacancies is either sufficiently high or
sufficiently low, the unique equilibrium has the firms babbling and search is
random. If the tightness of the labor market takes on intermediate values,
there is also an equilibrium where the cheap-talk is informative, high and low
productivity firms post different messages and the search process of the
workers is directed.
“High-Frequency Wage Rigidity,”
Job Market Paper (2005).
In the context of a frictional model of
the labor market with off and on the job search, I advance a novel model of
wage determination where contracts are non-binding and firms have private
information about the productivity of labor. The characterization of the
intra-firm bargaining game leads to a reduced-form model where the firm chooses
the wage subject to a non-discrimination and consistency constraints. The
fundamental property of the optimal firm-wage policy is high-frequency wage
rigidity. While the firm does not respond to productivity shocks whose
persistence falls below a critical threshold, the wage is a non-degenerate
function of the long-term component of labor productivity. A calibrated version
of the model shows that the cyclical behavior of the model is quantitatively
consistent with the empirical regularities of the labor market at the business
cycle frequency. Among other things, wages are nearly acyclical, the
semi-elasticity of the average labor productivity to unemployment is smaller
than one, and vacancies are almost perfectly correlated with unemployment.
Work in Progress
“Equilibrium Price Dispersion and Rigidity,” with
Allen Head, Lucy Qian Liu and Randall Wright.
“Monetary Theory with Non-Degenerate Distributions,”
with Shouyong Shi and Hongfei
Sun.