Peter A. Diamond

Aggregate Demand Management in Search Equilibrium

Equilibrium is analyzed for a simple barter model with identical risk-neutral agents where trade is coordinated by a stochastic matching process. It is shown that there are multiple steady-state rational expectations equilibria, with all non-corner solution equilibria inefficient. This implies that an economy with this type of trade friction does not have a unique natural rate of unemployment.

Wage Determination and Efficiency in Search Equilibrium

Using a simple search technology and the Nash bargaining solution, the paper derives the steady state equilibrium negotiated wage as a function of the equilibrium unemployment and vacancy rates. For this wage, the lifetime expected present discounted value of earnings of a new worker is compared with the social marginal product of a new worker. These are not generally equal implying inefficient incentives for labour mobility.

A framework for social security analysis

Abstract The public provision of pensions in the U.S. by means of the Social Security systems is examined relative to conventional arguments for public intervention. The system is analysed in terms of income redistribution, the provision of insurance where private markets are not efficient, and the compelling of saving by individuals.

A Model of Social Insurance With Variable Retirement

Abstract Models are studied, in which ability to supply labour is affected by a random variable (health) not observable by government. When ill-health strikes, the consumer must retire, but he may choose to retire in any case. Optimal social insurance policies are found for one-period, two- period, and continuous-time models. It is found that, under plausible conditions, at the optimums consumers are indifferent whether to work or not, but do work when able. Insurance contributions decrease with age, and insurance benefits increase with age of retirement. It is desirable to prevent private saving. Some comments on the U.S. Social Security system are added.

A many-person Ramsey tax rule

Abstract Define the social marginal utility of an individuals income as the gain to society of a unit of consumption by the individual plus the value of his marginal propensity to pay taxes out of income. This concept rather than the social marginal utility of consumption (equal to the first term above) seems helpful in understanding optimal tax first order conditions. For example, with many consumers (and a poll tax as well as excise taxes) the change in aggregate compensated quantity demanded is proportional to the covariance between individual quantities demanded and social marginal utilities of income.

An Equilibrium Analysis of Search and Breach of Contract, I: Steady States

We study the steady-state equilibrium of models where individuals meet pairwise in a costly stochastic search process and negotiate contracts to product output. Different meetings yield different outputs, and so an individual in a contract may wish to continue search to find a better match. If he is successful, he will break his original contract. In anticipation of possible breaches, contracts may provide for compensation to be paid to the breached-against partner. We examine the effects that several alternative damage rules have on equilibrium search and breach behavior.

Mobility costs, frictional unemployment, and efficiency

With imperfect job information flows, it is plausible that the distribution of job offerings becomes more attractive when there are more vacancies and more unemployed. With word-of-mouth communication, this condition is derived. Given this condition, steady-state equilibrium is not efficient, with welfare increased by the introduction of unemployment compensation even though all agents are risk neutral. In this way workers become more selective in the jobs they accept.

Income taxation with fixed hours of work

Abstract When all jobs are full time and workers cannot substitute alternative jobs, the skills of workers are observable. Nevertheless, the optimum may involve a benefit for those who choose not to work (making their skills unobservable). When the tax structure and benefit for nonworkers are chosen to maximize welfare, they tradeoff the social marginal utility of consumption against the needed incentive to work. In contrast to more conventional models, the optimal tax schedule may have discontinuities and may involve subsidization of the work of low earners.

Consumption Externalities and Imperfect Corrective Pricing

Pricing congested facilities above marginal production cost is a conventional approach to improving resource allocation. Where everyone is producing the same externality, a uniform price (in excess of marginal cost by the value of the externality) permits the competitive equilibrium to be Pareto optimal. Where individuals give rise to different externalities, but a uniform price is in effect, we have a second-best situation. When demands depend only on price, price should exceed marginal cost by a weighted average of externalities generated, the weights being the price derivatives of demand. When demands also depend on congestion, the optimal price generally diverges from this rule. The price should be lower when the individuals giving large external diseconomies per unit demanded tend to be price insensitive and congestion sensitive in their demands (relative to the average). In this case public expenditures to decrease congestion directly should not be carried to the point where the marginal direct benefit from congestion reduction equals the marginal cost. Optimal income distribution is also examined.

Economic Aspects of Optimal Disability Benefits

This paper analyzes optimal disability and retirement (or welfare) benefits with imperfect disability evaluation (with some able workers judged disabled and some disabled workers judged able). Thus the levels of both disability and retirement benefits affect labor supply. With anyone not working eligible for retirement benefits, we analyze the optimal structure of benefits for a given disability screening mechanism and briefly consider the problem of optimal evaluations of disability evidence. In the United States, there is an overlap in eligibility for disability and retirement portions of Social Security. More generally, welfare is sometimes available to people denied disability benefits.