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On the efficiency properties of the Roy?s model under asymmetric information

Author

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  • Concetta Barbara Mendolicchio

    (Institute for Employment research - IAB)

  • Tito Pietra

    (Universita di Bologna)

Abstract

We consider Roy?s economies with perfectly competitive labor markets and asymmetric information. Firms choose their investments in physical capital before observing the characteristics of the labor markets they will face. We provide conditions under which equilibrium allocations are constrained Pareto efficient, i.e., such that it is impossible to improve upon the equilibrium allocation by changing agents? investments and letting the other endogenous variables adjust to restore market clearing. We also provide a robust example of a class of economies where these conditions fail and where equilibria are characterized by overinvestments in high skills. The results can contribute indirectly to the literatureon optimal taxation in Roy?s models.

Suggested Citation

  • Concetta Barbara Mendolicchio & Tito Pietra, 2016. "On the efficiency properties of the Roy?s model under asymmetric information," Proceedings of International Academic Conferences 3606311, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:3606311
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    File URL: https://iises.net/proceedings/23rd-international-academic-conference-venice/table-of-content/detail?cid=36&iid=069&rid=6311
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    Keywords

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    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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