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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.

Suggested Citation

  • Bruce Greenwald & Joseph E. Stiglitz, 1988. "Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models," NBER Working Papers 2651, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2651
    Note: EFG

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    References listed on IDEAS

    1. 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 434-462, October.
    2. Pissarides, Christopher A, 1984. "Search Intensity, Job Advertising, and Efficiency," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 128-143, January.
    3. Arthur J. Hosios, 1984. "A Welfare Analysis of Employment Contracts with and without Asymmetric Information," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 471-489.
    4. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
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    Cited by:

    1. François Contensou & Radu Vranceanu, 1998. "A model of working time under utility competition in the labor market," Journal of Economics, Springer, vol. 67(2), pages 145-166, June.
    2. François Contensou & Radu Vranceanu, 1996. "Structure de coût généralisée et horaire optimal," Économie et Prévision, Programme National Persée, vol. 125(4), pages 37-50.
    3. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    4. repec:eee:labchp:v:3:y:1999:i:pb:p:2567-2627 is not listed on IDEAS
    5. Giulio Palermo, 2005. "Misconceptions of Power: From Alchian and Demsetz to Bowles and Gintis," Working Papers ubs0510, University of Brescia, Department of Economics.
    6. Knight, John & Yueh, Linda, 2004. "Job mobility of residents and migrants in urban China," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 637-660, December.
    7. Stiglitz, Joseph E., 2002. "New perspectives on public finance: recent achievements and future challenges," Journal of Public Economics, Elsevier, vol. 86(3), pages 341-360, December.
    8. Roger E.A. Farmer, 2013. "Animal Spirits, Financial Crises and Persistent Unemployment-super-," Economic Journal, Royal Economic Society, vol. 0, pages 317-340, May.

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