On the functioning of markets with frictions

We aim to explain the dynamics of the labor and housing markets, where search frictions matter (buyers meet a limited amount of sellers per unit of time). With search frictions, someone?s expected utility and optimal behavior depend on other people via spillovers (congestion or thick market externalities) and strategic complementarities. To provide explanations for the observed fluctuations in labor and housing markets, we introduce learning and heterogeneity. This may result in endogenous cycles in wages and employment, or housing prices and trading volumes, without exogenous shocks. Finally, we calibrate the models to test their empirical performance, and derive policy implications.