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Market power and efficiency in a search model

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  • Manolis Galenianos
  • Philipp Kircher
  • Gabor Virag

Abstract

We build a theoretical model to study the welfare effects and resulting policy implications of firms’ market power in a frictional labor market. Our environment has two main characteristics: wages play a role in allocating labor across firms and there is a finite number of agents. We find that the decentralized equilibrium is inefficient and that the firms’ market power results in the misallocation of workers from the highto the low-productivity firms. A minimum wage forces the low-productivity firms to increase their wage, leading them to hire even more often thereby exacerbating the inefficiencies. Moderate unemployment benefits can increase welfare because they limit firms’ market power by improving the workers’ outside option.

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File URL: http://eprints.lse.ac.uk/29706/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 29706.

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Date of creation: 2011
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Publication status: Published in International Economic Review, 2011, 52(1), pp. 85-104. ISSN: 0020-6598
Handle: RePEc:ehl:lserod:29706

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  1. James Albrecht, Pieter Gautier, & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Application," Working Papers, Georgetown University, Department of Economics gueconwpa~03-03-02, Georgetown University, Department of Economics.
  2. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  3. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
  4. David Card & Alan Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," Working Papers 694, Princeton University, Department of Economics, Industrial Relations Section..
  5. Ramon Marimon & Fabrizio Zilibotti, 1997. "Unemployment vs. mismatch of talents: Reconsidering unemployment benefits," Economics Working Papers 211, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Manning, Alan, 2004. "Monopsony and the efficiency of labour market interventions," Labour Economics, Elsevier, vol. 11(2), pages 145-163, April.
  7. Manolis Galenianos & Philipp Kircher, 2012. "On the game-theoretic foundations of competitive search equilibrium," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29707, London School of Economics and Political Science, LSE Library.
  8. Philipp Kircher, 2009. "Efficiency of simultaneous search," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 29703, London School of Economics and Political Science, LSE Library.
  9. Galenianos, Manolis & Kircher, Philipp, 2009. "Directed search with multiple job applications," Journal of Economic Theory, Elsevier, vol. 144(2), pages 445-471, March.
  10. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
  11. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
  12. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(1), pages 1-21, January.
  13. Melvyn G. Coles & Jan Eeckhout, 2000. "Heterogeneity as a coordination device," Economics Working Papers 510, Department of Economics and Business, Universitat Pompeu Fabra.
  14. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Shouyong Shi, 1998. "Frictional Assignment," Working Papers, Queen's University, Department of Economics 988, Queen's University, Department of Economics.
  16. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  17. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(1), pages 163-79, February.
  18. Manolis Galenianos & Philipp Kircher, 2007. "Heterogeneous Firms in a Finite Directed Search Economy," PIER Working Paper Archive 07-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  19. Marja-Liisa Halko & Klaus Kultti & and Juha Virrankoski, 2008. "Search Direction And Wage Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 111-134, 02.
  20. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  21. L. Kaas & P. Madden, 2006. "Minimum Wages and Welfare in a Hotelling Duopsony," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0604, Economics, The University of Manchester.
  22. Alan Manning & Ted To, 2002. "Oligopsony and Monopsonistic Competition in Labor Markets," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 155-174, Spring.
  23. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, Econometric Society, vol. 59(5), pages 1425-54, September.
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Cited by:
  1. Eeckhout, Jan & Kircher, Philipp, 2010. "Sorting versus screening: Search frictions and competing mechanisms," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1354-1385, July.
  2. Jacquet, Nicolas L. & Tan, Serene, 2012. "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1064-1104.
  3. Jean Guillaume Forand, 2012. "Competing Through Information Provision," Working Papers 1201, University of Waterloo, Department of Economics, revised Apr 2012.
  4. Wolthoff, Ronald P., 2011. "It's About Time: Implications of the Period Length in an Equilibrium Job Search Model," IZA Discussion Papers 6002, Institute for the Study of Labor (IZA).

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