Essays in search theory

Search frictions imply that is costly to find a good partner. As a result the decision to accept a partner takes into account the opportunity of finding an alternative, hence, the acceptance decision of an economic partnership is the answer to the question: is the quality of the partner good enough? Conversely, search frictions imply that once a good partner is found, it is costly to lose her, and this should if possible be avoided. This dissertation analyzes the effect of uncertainty in duration of good matches, and the investments an agent is willing to make ex ante in order to have good (enough) relationships. To be concrete, I focus my attention on the uncertainty of losing one\u27s partner over the course of a partnership, e.g. a worker losing a job at a firm, and how this uncertainty affects economic choices. For the worker this choice could be to take up alternative employment, for the firm which wages to pay to avoid turnover. Also, in a related setting but with different focus, I study the (signaling) investments an economic agent is willing to make to be accepted as a partner by other self-interested agents, when all agents are of different quality. In the second chapter of this dissertation I look at the uncertainty about the duration of relationships caused by a termination hazard on both sides of the partnership, how these risks interact, and how the firm designs a wage schedule over the course of the employment relationship to mitigate the participation risks. In the third chapter (written jointly with Roberto Pinheiro), I investigate whether a higher uncertainty of employment duration co-occurs with lower wages in the labor market equilibrium, when firms differ with respect to the separation hazard. We find that for the most part average wages of \u27risky employment\u27 are lower, and these companies are smaller, as has been found empirically. In the last chapter, I study the matching and signaling patterns, when agents have search for their counterpart, while signaling their quality. The search frictions give rise to different patterns (matching in classes)