Three Essays on Search: Optimal Policy with Heterogeneous Workers

The present thesis contributes to the theoretical analysis of the human capital investment and participation decision of heterogeneous workers in the search and matching framework. Its aim is to characterise the equilibrium and to identify the efficiency. The first chapter of this thesis contributes to study equilibrium search and matching to consider the participation decision of heterogeneous workers who have different inherent ability level. The productivity investment decision is endogenous and wages are determined by the Nash bargain among participants. In steady-state equilibrium investment decision reveals the hold-up problem. Given overall labor market condition, equilibrium is determined by free entry condition, optimal productivity investment decision, the participation constraint plus the steady state conditions. In this model I also show that heterogeneity is not the cause of multiplicity. The second chapter utilises the previous analysis to identify those government policies that can achieve efficiency in an economy. I show that the number of labor market participants and job creation and productivity investment are inefficient owing to externalities resulting from participation decision, productivity investment and market tightness condition. Therefore, in my first best policy scenario, I find the government should subsidise training, tax labour market participation and subsidise job creation. The last chapter considers an integrated framework where social security benefits are chosen to induce optimal search by unemployed workers given the income tax structure imposed by the government. As tax policy distorts the willingness of workers to find employment, it provides a simple rule which identifies the link between optimal social security benefits paid and the tax system. Specifically in the case of a universal, linear income tax scheme, optimal social security benefits should be paid at a flat rate; i.e. all receive the same benefit level regardless of earnings which is the main contribution of the paper.