Small Markets

Asa Rosen and Espen Moen ()
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Asa Rosen: University of Stockholm and London School of Economics

No 732, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: Efficiency in competitive search equilibrium requires that heterogeneous workers search in different search markets. In this paper we construct a competitive search model with a given number of search markets, where the workers only observe the wages offered in a limited number of submarkets. As a result, heterogeneous workers are not able to fully self-select into different submarkets, and all workers will end up searching in search markets in which there are also workers of other types. We show that the equilibrium of the model is a "Maximum segmentation allocation" (MSA), where workers are segmented to the largest degree possible given the information constraints. We show that the expected income of a given worker depends positively on the fraction of workers of his type in the economy. This gives rise to feedback effects. For instance, the return from investments in human capital is an increasing function of the fraction of workers that do invest, and this may lead to multiple equilibria.

Date: 2007
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