Essays in Equilibrium Search Theory

Abstract

Equilibrium search models have provided many insights in the analysis of labor markets and consumer product markets. While much research has been conducted on the basis of random matching, the essays in this thesis put emphasis on the explicit modelling of the way in which trading partners search for one another. This structure allows the investigation of how agents use the information that is available in the market when determining their search strategy. Moreover, the explicit modelling of the search process admits a straightforward introduction of search intensity in a structural way, which yields new insights into questions of allocative efficiency, wage dispersion and social learning.<br /> The first two essays deal with multiple applications in a directed search environment. They investigate a labor market in which firms can directly compete with each other for the workers’ labor services by publicly advertising the wage offer for each vacancy. After observing the wages workers strategically decide to which firms to apply. This constitutes their search strategy. Extending existing models, these essays allow workers to choose the number of firms to which they want to apply, which can be interpreted as a choice of search intensity. This yields a portfolio choice problem for the workers since they have to decide on the optimal portfolio of firms in their application set given the application strategies of the other workers. The essays investigate the implications for wage dispersion, unemployment and allocative efficiency. They show that the directedness of the competition can induce a downward shape in the wage density despite homogeneity of workers and firms; a result which has been difficult to obtain in random search models. Furthermore, they show that constrained efficiency does not necessarily arise when workers send multiple applications. Yet, for a matching process that is stable (given the applications of the workers) the equilibrium interaction is constrained optimal in terms of number of firms, number of workers, and application behavior.<br /> The last essay considers an equilibrium model of social learning in a consumer product market with heterogeneous consumers and firms. Consumers search for high qualities among a large set of firms, and can condition their choices on observed actions of other consumers. Their search strategy entails how often to consume and where to buy given the available information. When they can recognize consumers who are more likely to have identified a high quality firm, uninformed individuals will optimally emulate those consumers. One group of consumers arises endogenously as "leaders" who are being emulated. Follow-on sales induce firms to give preferential treatment to these lead consumers, which reinforces their learning. The essay identifies the conditions that allow a group to arise as leaders, and discusses social components such as the role of relative position in society and the role of conspicuous consumption.