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Learning by Doing, Short-sightedness and Indeterminacy

Authors


  • I thank the editor, Wouter den Haan, and two anonymous referees for their helpful comments. George Evans and Shankha Chakraborty provided many helpful comments and suggestions for which I am immensely grateful. I thank Tom Sargent, seminar participants at the Learning Week Conference at the Federal Reserve Bank of St. Louis, the University of Oregon, the University of Kentucky, the Federal Reserve Bank of San Francisco, Fordham University, the College of William and Mary, the University of Wisconsin-Milwaukee and Bates College.

Corresponding author: Paul Shea, 271 Pettengill Hall, Bates College, Lewiston, ME, USA. Email: pshea@bates.edu.

Abstract

This article introduces firm-specific learning by doing into a real business cycle (RBC) model. This assumption results in indeterminacy of the wage over a large portion of the parameter space: when firms use sufficiently high discount factors and when newly employed labour is relatively unproductive. When firms and households use the same discount factor, the effects of indeterminacy are limited to adding volatility to the wage rate. If these discount factors differ, however, then indeterminacy also destabilises newly employed labour and total hours. This result helps to explain the high amount of volatility that newly employed labour exhibits in the US data.

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