 Misallocation inefficiency in partially directed searchStanislav Rabinovich and Ronald Wolthoff Journal of Economic Theory, 2022, vol. 206, issue C Abstract: We identify a misallocation inefficiency in search models, which is distinct from the aggregate entry distortion emphasized in the previous literature, and arises instead from partially directed search. We consider a framework in which workers differ in whether they can direct their search, and firms are heterogeneous in productivity. The main result is that too many workers apply to high-productivity firms, relative to the social optimum. This occurs because too many firms attract only random searchers, in order to extract more surplus from them. Because it is the low-productivity firms that do so, this induces all the directed searchers to concentrate at the high-productivity firms. A minimum wage can increase employment and welfare by reallocating workers across firms. With endogenous entry by either workers or firms, the misallocation inefficiency coexists with a standard entry externality; in this case, a proper combination of a tax or subsidy and a minimum wage can restore the efficient allocation. Keywords: Directed search; Random search; Labor markets; Minimum wage; Misallocation; Market power (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:206:y:2022:i:c:s0022053122001491 DOI: 10.1016/j.jet.2022.105559 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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