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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.

Suggested Citation

  • Berliant, Marcus & Kung, Fan-chin, 2010. "Can information asymmetry cause stratification?," Regional Science and Urban Economics, Elsevier, vol. 40(4), pages 196-209, July.
  • Handle: RePEc:eee:regeco:v:40:y:2010:i:4:p:196-209
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    Cited by:

    1. Marcus Berliant & Hiroki Watanabe, 2015. "Explaining the size distribution of cities: Extreme economies," Quantitative Economics, Econometric Society, vol. 6(1), pages 153-187, March.
    2. Marcus Berliant & Chia-Ming Yu, 2015. "Locational Signaling And Agglomeration," Journal of Regional Science, Wiley Blackwell, vol. 55(5), pages 757-773, November.

    More about this item

    Keywords

    Adverse selection Stratification;

    JEL classification:

    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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