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Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models

  • Bruce Greenwald
  • Joseph E. Stiglitz

This paper shows that market economies with search and in which wages are affected by efficiency wage considerations are not constrained Pareto efficient. Wages are not set at Pareto efficient levels, nor is the level of employment (unemployment) Pareto efficient. We identify the nature of the biases and the welfare improving government interventions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2651.

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Date of creation: Jul 1988
Date of revision:
Publication status: published as The American Economic Review, Vol. 78, No. 2, pp. 351-355, (May 1988).
Handle: RePEc:nbr:nberwo:2651
Note: EFG
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  1. Pissarides, Christopher A, 1984. "Search Intensity, Job Advertising, and Efficiency," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 128-43, January.
  2. Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May.
  3. Arnott, Richard J & Stiglitz, Joseph E, 1985. "Labor Turnover, Wage Structures, and Moral Hazard: The Inefficiency of Competitive Markets," Journal of Labor Economics, University of Chicago Press, vol. 3(4), pages 434-62, October.
  4. Hosios, Arthur J, 1984. "A Welfare Analysis of Employment Contracts with and without Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 471-89, July.
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