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Market power and efficiency in a search model

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  • Manolis Galenianos
  • Philipp Kircher
  • Gabor Virag
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    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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    References

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    1. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
    2. Leo Kaas & Paul Madden, 2010. "Minimum wages and welfare in a Hotelling duopsony," Economic Theory, Springer, vol. 43(2), pages 167-188, May.
    3. James Albrecht, Pieter Gautier, & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Application," Working Papers gueconwpa~03-03-02, Georgetown University, Department of Economics.
    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. Manolis Galenianos & Philipp A. Kircher, 2005. "Directed Search with Multiple Job Applications," Bonn Econ Discussion Papers bgse20_2005, University of Bonn, Germany.
    6. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
    7. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
    8. 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.
    9. 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.
    10. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Philipp Kircher, 2009. "Efficiency of Simultaneous Search," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 861-913, October.
    12. Alan Manning, 2001. "Monopsony and the Efficiency of Labour Market Interventions," CEP Discussion Papers dp0514, Centre for Economic Performance, LSE.
    13. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
    14. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
    15. Coles, Melvyn G. & Eeckhout, Jan, 2003. "Indeterminacy and directed search," Journal of Economic Theory, Elsevier, vol. 111(2), pages 265-276, August.
    16. 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.
    17. 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.
    18. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    19. Manolis Galenianos & Philipp Kircher, 2009. "Directed search with multiple job applications," LSE Research Online Documents on Economics 29702, London School of Economics and Political Science, LSE Library.
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    Cited by:
    1. Jan Eeckhout & Philipp Kircher, 2010. "Sorting versus screening: search frictions and competing mechanisms," LSE Research Online Documents on Economics 29704, London School of Economics and Political Science, LSE Library.

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