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Directed Search with Endogenous Search Effort.

Directed Search with Endogenous Search Effort.

Figure 2: Wage, taking

Figure 2: Wage, taking as given the behaviour of the rest of the society. Here agents do not take into account the relation between their behavior and the behavior of the rest of the agents, they just take S as …xed. As in equilibrium all agent make S applications, the equilibrium cumulative distribution of the return looks like follows: Figure 3: Wage distribution. 11

when agents take S as given, they believe that by increasing the number of applications they will, individually, face a distribution that stochastically dominates the distributions corresponding to fewer applications. In equilibrium the distributions cross each other, so there is no dominance. This is re‡ected in the negative externality related to the excessive number of applications in equilibrium. Agents choose S to maximize the expected return, taking as given the behavior of the rest of the society. The density function of the wage is: r(W ) = S S 1 1 O(S; ) S Q Q w W S S 1 1 Q W . (18) The problem of the agents is to maximize the return, that is, the expected wage minus the cost of applications: Max S Q (Q w)(1 Z O(S;)) S 1 w W r(W )dW Sc. (19) This can be written as: Max S Q S(Q w)(1 O(S;))S 1 ((S 1)Q Sw)(1 O(S;)) S 1+S S Sc. (20) This function has a unique maximum with respect to S. The …rst-order condition, once I impose the symmetry condition S = S is: (S 1) (1 O(S; )) S (Q w)O(S;) Q w S 1 O(S;) S 1 (ln(1 O(S; )) 1 ) = c. (21) Observe that in this expression, the term Q w S S 1 makes the reservation wage more relevant than what it is generally assumed. It is usual to assume that the relevant variable is just the di¤erence between production and the reservation wage, so the reservation wage is set to zero. This simpli…cation cannot be done here 12

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