Reciprocity and Matching Frictions

The ability of search and matching models to replicate stylized facts - such as volatilities

and correlations - have been a center of attraction over the last couple of years. This paper

introduces the Akerlof (1982) fair wage approach into an endogenous separation search and

matching model. Within a RBC general equilibrium context, we show that the e¢ ciency wage

model outperforms its benchmark Nash bargaining pendant. In particular, the model generates

the empirically observed volatilities in response to a productivity shock and replicates a strong Beveridge curve. Furthermore, we derive the Solow condition in a search environment and

discuss the interactions of search and efficiency wage frictions. We show that search frictions create a wedge between the optimal wage/effort solution in the search and the competitive equilibrium. The efficiency wage consideration adds an additional margin to the firms decision problem. As e¤ort varies over the cycle, it changes the firms optimal response to exogenous disturbances and amplifies the response to shocks.