An Equilibrium Model of Wage Dispersion and Sorting
w/ Jesper Bagger

March 2007. Last revision: December 2008.

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Labor Market Friction, Firm Heterogeneity, and Aggregate Employment and Productivity
w/ Dale T. Mortensen

October 2006. Last revision: October 2008.

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Optimal Growth through Product Innovation
w/ Dale T. Mortensen

July 2006.Under revision.

Forthcoming Journal of Economic Theory.
*Previously circulated under the title "Sorting in a General Equilibrium On-the-Job Search Model."

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Review of Economic Dynamics, January 2009, vol. 12(1), pp. 37-57.

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Abstract: This paper estimates a job search model with savings on Danish microdata that include observations on wealth and wages. Controlling for extensive observed and unobserved worker characteristics heterogeneity, the estimation relates observed unemployment spells to the model implied hazard rate for each worker. The model estimates are sensible and fit the data well. Optimal UI policy is determined in the estimated model as a trade-off between insurance provision and distortion of search incentives. The analysis emphasizes an important policy sensitivity to the interest rate and the importance of including transitional dynamics in the analysis.

Econometrica, November 2008, vol. 76(6), pp. 1317-73.

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Abstract: Productivity differences across firms are large and persistent but the evidence for worker reallocation as an important source of aggregate productivity growth is mixed. The purpose of the paper is to estimate the structure of an equilibrium model of growth through innovation designed to identify and quantify the role of resource reallocation in the growth process. The model is a version of the Schumpeterian theory of firm evolution and growth developed by Klette and Kortume (2004) extended to allow for firm heterogeneity. The data set is a panel of Danish firms that includes information on value added, employment, and wages. The model's fit is good. The estimated model implies that more productive firms in each cohort grow faster and consequently crowd out less productive firms in steady state. This selection effect accounts for 53% of aggregate growth in the estimated version of the model.

International Economic Review, August 2005, vol. 46(3), p. 731-751.

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Abstract: Productivity dispersion across firms is large and persistent, and worker reallocation among firms is an important source of productivity growth.An equilibrium model of growth and firm evolution designed to clarify the role of worker reallocation in the growth process is studied.We show that it explains the correlations between size measures and labor productivity found in Danish firm data. Conditions under which the reallocation of workers from less to more productive
firms contributes to aggregate productivity growth in the economy modeled are derived. Finally, a proof of existence of an equilibrium solution to the model is also provided.

Journal of Labor Economics, July 2005, vol 23(3), p. 467-90.

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Abstract: This article studies a risk-averse worker’s optimal savings and job search behavior as she moves back and forth between employment and unemployment. We show that job search effort is negatively related to wealth under the assumption of additively separable utility. Consequently, job search exhibits positive unemployment duration dependence because wealth is drawn down to smooth consumption as the spell progresses. Finally, given optimal search, savings still provide imperfect insurance against income fluctuations; precautionary savings are built up during employment spells and run down during unemployment spells, but the consumption path will not be perfectly smooth over states.

Journal of Labor Economics, January 2005, vol. 23(1), p. 31-58.

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Abstract: The article structually estimates an on-the-job search model of job separations. Given each employer pays observably equivalent workers the same but wages are dispersed across employers, an employer’s separation flow is the sum of an exogenous outflow unrelated to the wage and a job-to-job flow that decreases with the employer’s wage. Using data from the Danish Integrated Database for Labour Market Research, the empirical results imply, as predicted by theory, that search effort declines with the wage. Furthermore, the estimates explain the employment effect, defined as the horizontal difference between the distribution of wages earned and the wage offer distribution.