Search Frictions, Unemployment, and Housing in Cities : Theory and Policies

We propose an urban search‐matching model with land development. Wages, unemployment, prices of housing and land are endogenously determined. We characterize the steady‐state equilibrium and then discuss the issue of efficiency. To explore interactions among markets, we implement comparative static analysis. We also consider three policies: an entry‐cost policy that reduces firms' entry, a transportation policy that reduces commuting costs, and a housing policy that decreases rental prices. We find that the transportation and housing policies are more efficient if the unemployment rate is low, while the entry‐cost policy is more efficient if the unemployment rate is high