substantially revised version published as 'Empirical Matching Functions: Searchers, Vacancies, and (Un-)biased Elasticities' in: Economica, 2007, 74 (295), 537-560
This paper develops a model of equilibrium unemployment with (unobservable) endogenous
on-the-job search and (partly unobservable) endogenous search behavior by firms. The
model allows to analyze crowding-out of unemployed job seekers by endogenous on-the job
search of employees, and the interaction of job search behavior and vacancy posting policies
of firms. Moreover, it is shown that the neglect of endogenous but not observable behavior in
the empirical literature on labor matching leads to systematically biased estimates of the
matching elasticities, posing a caveat on the results of previous studies testing for constant
returns of the matching function. The theoretical model presented allows to predict the
direction of the bias. We propose a correction for the estimates of empirical matching
functions that leads to unbiased estimates of the matching elasticities. The empirical
implications of the theoretical model are tested and confirmed using German administrative
data, and unbiased estimates of matching elasticities are presented.
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