An Information-based Theory of Monopsony Power

Anton Cheremukhin and Paulina Restrepo-Echavarria

No 2025-026, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We develop an information-based theory of monopsony power that unifies search frictions and job differentiation by endogenizing worker search and firm screening through rational inattention. The model yields a closed-form wage equation that decomposes the sources of monopsony power and nests directed and random search as limiting cases. The framework reconciles strong assortative matching with flat wage-productivity profiles, large wage markdowns with small firm wage effects, and high estimated labor supply elasticities with substantial monopsony power. Estimating the model on a matched employer-employee dataset, we find that firms drive sorting through selective screening while compressing wages toward workers' outside options.

Keywords: monopsony (search for similar items in EconPapers)
JEL-codes: J42 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2025-09-30, Revised 2026-09-29
New Economics Papers: this item is included in nep-com and nep-lma
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Working Paper: An Information-Based Theory of Monopsony Power (2025)
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DOI: 10.20955/wp.2025.026

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