Signals in two-sided search

• Main Author: Poeschel, Friedrich Gerd
• Other Authors: Keller, Godfrey : Postel-Vinay, Fabien
• Published: University of Oxford 2011
• Subjects: 331.12; Economics : Labour economics : search : matching : signals : Diamond paradox : sorting : matching function
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.567826

We introduce signals to search models of two-sided matching markets and explore the implications for efficiency. In a labour market model in which firms can advertise wages and workers can choose effort, we find that advertisements can help overcome the Diamond paradox. Advertisements fix workers' beliefs, so that workers will react if firms renege on advertisements. Firms then prefer to advertise truthfully. Next, we consider a market with two-sided heterogeneity in which types are only privately observable. We identify a simple condition on the match output function for agents to signal their types truthfully and for the matching to exhibit positive assortative matching despite search frictions. While our theoretical work implies that the efficiency of matching increases as information technology spreads, empirical matching functions typically suggest that it declines. By estimating more general matching functions, we show that the result of declining efficiency can partly be attributed to omitted variable bias.