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Can information asymmetry cause stratification?

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  • Berliant, Marcus
  • Kung, Fan-chin

Abstract

The empirical literature has found evidence of locational sorting of workers by wage or skill. We show that such sorting can be driven by asymmetric information in the labor market, specifically when firms do not know if a particular worker is of high or low skill. In a model with two types and two regions, workers of different skill levels are offered separating contracts in equilibrium. When mobile low skill worker population rises or there is technological change that favors high skilled workers, integration of both types of workers in the same region at equilibrium becomes unstable, whereas sorting of worker types into different regions in equilibrium remains stable. The instability of integrated equilibria results from firms, in the region to which workers are perturbed, offering attractive contracts to low skill workers when there is a mixture of workers in the region of origin.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 40 (2010)
Issue (Month): 4 (July)
Pages: 196-209

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Handle: RePEc:eee:regeco:v:40:y:2010:i:4:p:196-209

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Web page: http://www.elsevier.com/locate/regec

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Keywords: Adverse selection Stratification;

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References

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Cited by:
  1. Berliant, Marcus & Yu, Chia-Ming, 2009. "Locational signaling and agglomeration," MPRA Paper 19462, University Library of Munich, Germany.
  2. Berliant, Marcus & Watanabe, Hiroki, 2009. "Explaining the size distribution of cities: x-treme economies," MPRA Paper 13671, University Library of Munich, Germany.

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