On the game-theoretic foundations of competitive search equilibrium

We provide a unified directed search framework with general production and matching specifications that encompasses most of the existing literature. We prove the existence of subgame perfect Nash equilibria in pure firm strategies in a finite version of the model. We use this result to derive a more complete characterization of the equilibrium set for the finite economy and to extend convergence results as the economy becomes large to general production and matching specifications. The latter extends the micro-foundations for the standard market-utility assumption used in competitive search models with a continuum of agents to new environments. ∗Submitted on February 9th 2010. †This work supersedes the related results that we distributed in the working paper “Heterogeneous Firms in a Finite Directed Search Economy”. We thank Daron Acemoğlu, Ken Burdett, Jan Eeckhout, Mike Peters, Philip Reny, Shouyong Shi, Neil Wallace, Randy Wright and an anonymous referee for helpful comments. Galenianos thanks the National Science Foundation for financial support (grant SES-0922215). Kircher thanks the National Science Foundation for financial support (grant SES-0752076).