Sequential Pre-Marital Investment Games: Implications for Unemployment

Agents on the same side of a two-sided matching market (such as the marriage or labor market) compete with each other by making self-enhancing investments to improve their worth in the eyes of potential partners. Because these expenditures generally occur prior to matching, this activity has come to be known in recent literature (Peters, 2007) as pre-marital investment. This paper builds on that literature by considering the case of sequential pre-marital investment, analyzing a matching game in which one side of the market invests first, followed by the other. Interpreting the first group of agents as workers and the other group as firms, the paper provides a new perspective on the incentive structure that is inherent in labor markets. It also demonstrates that a positive rate of unemployment can exist even in the absence of matching frictions. Policy implications follow, as the prevailing set of equilibria can be altered by restricting entry into the workforce, providing unemployment insurance, or subsidizing pre-marital investment.

Expectations, and Credibility in a Model of Monetary Policy

Recent monetary history has been characterized by monetary authorities which have been, alternatively hard and soft on inflation. In a vintage capital framework, investment decisions are not easily reversed. Therefore, expectations of policy as well as current policy are important to the investment decision. Here, a vintage capital model is used to assess the value of central bank credibility for a policy change. Policy in this model is assumed to be private information of the central banker. Agents learn about that policy which to study the ensuing transitional dynamics following a change in monetary policy regime.