By Ian King and Frank Frank Stähler
We present a dynamic general equilibrium model in which both unemployment and capital utilization are determined endogenously in an environment with directed search frictions. The model allows for proportions of both labor and capital to be idle in equilibrium, where the degree of capital utilization determines its depreciation. We show that, under certain conditions, multiple steady state equilibria exist. In stable equilibria, both unemployment and capital utilization rates decline as productivity increases.
Getting endogenous idleness for two factors of production is tricky, and this paper makes a good attempt at this. I am intrigued by the result of multiple equilibria though, in particular whether it is only valid locally. What I have in mind is the observation that less productive economies seem to have a lot of idle capital and people, at least compared to developed ones.