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An Information-Based Theory of Monopsony Power

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Abstract

We develop a tractable model of monopsony power based on information frictions in job search. Workers and firms choose probabilistic search strategies, with information costs limiting how precisely they can target matches. Firms post wages strategically, anticipating application behavior and exploiting a first-mover advantage. The model nests both directed and random search as limiting cases and yields a closed-form wage equation that shows the effects on wage-setting power of search frictions, labor market tightness and sorting. Wage markdowns in equilibrium arise not only from limited labor supply elasticity but also from sorting patterns and demand-side frictions. In highly assortative environments, the absence of wage competition allows firms to capture nearly the full surplus, even when labor supply is elastic. Numerical results replicate markdowns of 30-40% and suggest that constrained-efficient wages would be approximately 20% higher. Our framework unifies the analysis of monopsony, sorting and wage posting, and provides a computationally efficient method for evaluating directed search equilibria.

Suggested Citation

  • Anton A. Cheremukhin & Paulina Restrepo-Echavarria, 2025. "An Information-Based Theory of Monopsony Power," Working Papers 2518, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:99989
    DOI: 10.24149/wp2518
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    References listed on IDEAS

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    1. Filip Matêjka & Alisdair McKay, 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model," American Economic Review, American Economic Association, vol. 105(1), pages 272-298, January.
    2. Guido Menzio, 2007. "A Theory of Partially Directed Search," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 748-769, October.
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    More about this item

    Keywords

    Monopsony power; labor market sorting; information frictions; directed search;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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