Chapter 1: Inefficiency in a Frictionless Market Gale and Sabourian (2006) discuss the existence of inefficient Markov-perfect equilibrium (MPE) in a heterogeneous market. This paper shows that the example they provide cannot be supported as a MPE. Indeed, with two buyers and two sellers, the dispersion of bargaining positions is not sufficiently wide to support any inefficient trades in their setup. I then prove that their conjecture is correct by constructing a continuum of inefficient MPE with three buyers and three sellers, where the dynamics of continuation payoffs is rich enough to support wide dispersion of bargaining positions at the first stage, which in turn renders inefficient trades individually rational. This suggests that the number of players in a market could be essential for allocative inefficiency. Chapter 2: Re-trading and Efficient Allocation Inefficient Markov-perfect equilibria (MPE) are prevalent in dynamic matching and bargaining games (DMBG). I observe this inefficiency is caused by a substantial friction commonly assumed in the literature: players must exit the market after trading once. In response, this paper studies a simple heterogeneous market with a finite number of players, where re-trading is allowed and each player can choose to exit the market at any period. I show that, for sufficiently small search cost, all MPE are allocative efficient. The reasoning is conceptually distinct from the existing literature, and indispensable to models where players are allowed to exit the market amidst the game. Chapter 3: Redistributive Effects of Search Frictions van den Berg and van Vuuren (2010) recorded the empirical puzzle that search frictions have a positive impact on the wages of managers, as against the prediction of the canonical model of Pissarides (2000). I argue the discrepancy is caused by the assumption of perfectly elastic vacancy supply in the latter, which is inappropriate for managerial labour markets. In response, I construct a search and matching model with perfectly inelastic vacancy supply, and show that the comparative statics with respect to search frictions are totally different. The results explain the divergent welfare impacts of search frictions on workers at different levels of the corporate hierarchy. They also show that lowering search frictions is not necessarily Pareto-improving even in a homogeneous setting.
Bargaining, Markov-perfect equilibrium, Random matching, Allocative efficiency, Frictionless, Re-trading, Matching markets, Search frictions, Matching efficiency, Frictional unemployment, Free entry condition
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