Efficiency of Directed Search

Philipp Kircher

No 93, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze a directed search labor market. Firms compete for labor through public wage postings. Then, workers choose their search intensity by deciding how often and where to apply for a job. In the last stage of the interaction, firms and applicants are matched according to a stable assignment. This can be interpreted as sequential offers by firms to their applicants. In contrast to models where only a single offer is made by each firm, the equilibrium is constrained efficient along the three operative margins: entry of firms, number of matches and number of applications. Surprisingly, wage dispersion is necessary for the market to achieve constrained efficiency despite homogeneity of workers and firms. For vanishing application costs the equilibrium outcome converges to the unconstrained efficient competitive outcome.

Date: 2007
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