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Small Markets

Author

Listed:
  • Asa Rosen

    (University of Stockholm and London School of Economics)

  • Espen R Moen

    (Norwegian School of Management)

Abstract

Efficiency in competitive search equilibrium requires that heterogeneous workers search in different search markets. In this paper we construct a competitive search model with a given number of search markets, where the workers only observe the wages offered in a limited number of submarkets. As a result, heterogeneous workers are not able to fully self-select into different submarkets, and all workers will end up searching in search markets in which there are also workers of other types. We show that the equilibrium of the model is a "Maximum segmentation allocation" (MSA), where workers are segmented to the largest degree possible given the information constraints. We show that the expected income of a given worker depends positively on the fraction of workers of his type in the economy. This gives rise to feedback effects. For instance, the return from investments in human capital is an increasing function of the fraction of workers that do invest, and this may lead to multiple equilibria.

Suggested Citation

  • Asa Rosen & Espen R Moen, 2007. "Small Markets," 2007 Meeting Papers 732, Society for Economic Dynamics.
    • Handle: RePEc:red:sed007:732
    as

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    References listed on IDEAS

    as
    1. Masters, Adrian M, 1998. "Efficiency of Investment in Human and Physical Capital in a Model of Bilateral Search and Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 477-494, May.
    2. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    3. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    4. Daron Acemoglu & Robert Shimer, 2000. "Wage and Technology Dispersion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(4), pages 585-607.
    5. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    6. Daron Acemoglu, 1996. "A Microfoundation for Social Increasing Returns in Human Capital Accumulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 779-804.
    Full references (including those not matched with items on IDEAS)

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