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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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21395.

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Date of creation: 12 Mar 2010
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Handle: RePEc:pra:mprapa:21395

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Keywords: Adverse Selection; Stratification;

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Cited by:
  1. Berliant, Marcus & Watanabe, Hiroki, 2009. "Explaining the size distribution of cities: x-treme economies," MPRA Paper 13518, University Library of Munich, Germany.
  2. Berliant, Marcus & Chia-Ming, Yu, 2014. "Locational signaling and agglomeration," MPRA Paper 55410, University Library of Munich, Germany.

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