SEARCH DIRECTION AND WAGE DISPERSION

Marja-Liisa Halko, Klaus Kultti () and and Juha Virrankoski

International Economic Review, 2008, vol. 49, issue 1, 111-134

Abstract: In a directed search model, we allow the unemployed and the vacancies to choose whether to send or receive wage offers. This determines the market structure. There are several equilibria but a unique evolutionary stable one. Wage offers are made under incomplete information about the number of offers, and the equilibrium strategies involve mixing. This results in wage dispersion. We show that if the unemployment-vacancy ratio is close to unity, the stable equilibrium consists of two submarkets with opposite search directions. Otherwise, the long side of the market sends offers. The stable equilibrium is efficient, given the frictions. Copyright 2008 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2008
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