The standard Mortensen and Pissarides (1994) search and matching model of equilibrium unemployment has been argued in many places to be inconsistent with key business cycle facts. In particular, it cannot explain the high volatilities of unemployment, vacancies and market tightness (Shimer, 2005), nor the persistence in the adjustment of these variables to exogenous shocks (Fujita and Ramey, 2007). Subsequent research has focused on whether the lack of internal propagation, both in terms of amplification and persistence, stems from the structure of the model itself or whether it is a question of setting an appropriate calibration.
Firms in these models must expend resources to fill job vacancies, a time-consuming process in the presence of search frictions on labor markets. Under Nash bargaining as a wage mechanism, wages absorb much of the change in the expected benefit to a new worker induced by fluctuations in labor productivity. As a result, Shimer (2005) argues, the incentive to post vacancies changes little over the business cycle. Quite naturally, subsequent research has focused on the dynamics of wages as a means of generating amplification of exogenous innovations. Such studies have either altered the particulars of the wage determination mechanism (e.g. Shimer 2004), or as in Hagedorn and Manovskii (2008), followed an alternative calibration strategy that results in a rigid wage. In order to address the second empirical shortcoming, the persistence in labor market adjustments to productivity shocks, a second strand of research has focused on the structure of vacancy costs. Fujita and Ramey (2007), for example, develop a story about sunk costs to vacancy creation such that the strongest change in market tightness occurs several periods after the original shock. Their approach, however, does not generate any additional amplification.
Research shows that people can have different ideas about the development of relationships. “Soulmate theorists” believe that there is only one person in the world that they can live a happy life with, whereas “workitout theorists” believes that a relationship can be successful through communication and problem solving. This study investigates if there is a difference in the way people approach intimate relationships depending whether their parents were divorced or married while they were growing up.
The distinction between systematic and idiosyncratic risk is an integral part of the canon of corporate finance. The simple capital asset pricing model (CAPM) is perhaps its best known form. Idiosyncratic risk is readily diversified, leaving the investor exposed to systematic risk, the non diversifable component. But firms have different sensitivities to systematic risk, and systematic risk itself may be multi-dimensional with distinct risk types originating in specific industries, sectors or regions. In general, the potential for portfolio diversification then is driven broadly by these two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence of individual firms on different risk factors.
Although this paradigm has been developed for the analysis of risk in liquid market assets, it is nevertheless relevant to an investor in less liquid credit assets where obligor default is an event of particular interest. Models of the joint distribution of losses from a portfolio of credit assets form the cornerstone for a variety of applications in finance, from credit risk management to the pricing of credit assets such as CDOs (collateralized debt obligations) and credit derivatives. Credit risk analysis introduces another source of heterogeneity, namely the default threshold. This may vary across firms due, for instance, to different capital structures, and across countries because of, say, different bankruptcy laws.
