“Simultaneous Search and Network Efficiency” by Pieter Gautier
Vrije Universiteit Amsterdam
Christian L. Holzner
University of Munich
When workers send applications to vacancies they create a network. Coordination frictions arise if workers do not know where other workers apply to and firms do not know which workers are considered by other .rms. We show that these coordination frictions and the wage mechanism are not independent. Only wage mechanisms that allow for ex post competition generate the maximum matching on any realized network. Efficient network formation requires that identical firms face the same arrival rate of applicants. If firms make offers to workers, the resulting equilibrium is socially inefficient in terms of vacancy creation, worker participation and search intensity. However, if workers would make offers to firms, efficiency is obtained in all dimensions.