Ted To

Oligopsony and monopsonistic competition in labor markets

We argue that models of oligopsony or monopsonistic competition provide insights and explanation for many empirical phenomena in labor markets. Using a simple model with job differentiation and preference heterogeneity, we illustrate how such models can be employed to explain the existence of wage dispersion, the persistence of labor market discrimination, market failures in the provision of training and the anomalous employment effects of minimum wages.

Too Cool for School? Signalling and Countersignalling

In signalling environments ranging from consumption to education, high-quality senders often shun the standard signals that should separate them from lower-quality senders. We find that allowing for additional, noisy information on sender quality permits equilibria where medium types signal to separate themselves from low types, but high types then choose to not signal, or countersignal. High types not only save costs by relying on the additional information to stochastically separate them from low types, but countersignalling itself is a signal of confidence that separates high types from medium types. Experimental results confirm that subjects can learn to countersignal.

Is perfect price discrimination really efficient? An analysis of free entry

We analyze models of product differentiation with perfect price discrimination and free entry. With a fixed number of firms, and in the absence of coordination failures, perfect price discrimination provides incentives for firms to choose product characteristics in a socially optimal way. However, with free entry, the number of firms is always excessive. Our results apply to a large class of models of product differentiation. They also apply to models of common agency or lobbying with free entry and imply that one has excessive entry into the ranks of the principals.

Can reduced entry barriers worsen market performance? A model of employee entry

Abstract The fundamental contribution of the paper is to contest the view that reducing barriers to entry cannot retard market performance when firm rivalry is productive. In a model of employee entry, we demonstrate that a reduction in barriers to entry causes no fall in industry price when incumbents are able to buy-off potential entry through higher wages. Over the longer term, the analysis illustrates that reductions in barriers to entry can cause industry price to be greater than if entry barriers had persisted at their initial level. Correspondingly, the model indicates that investment in endogenous barriers to entry and wage ceilings on executive salaries may enhance market performance.

Search and Non-Wage Job Characteristics

This paper quantifies the importance of non-wage job characteristics to workers by estimating a structural on-the-job search model. The model generalizes the standard search framework by allowing workers to search for jobs based on both wages and job-specific non-wage utility flows. Within the structure of the search model, data on accepted wages and wage changes at job transitions identify the importance of non-wage utility through revealed preference. The parameters of the model are estimated by simulated minimum distance using the 1997 cohort of the National Longitudinal Survey of Youth (NLSY97). The estimates reveal that utility from non-wage job characteristics plays an important role in determining job mobility, the value of jobs to workers, and the gains from job search. More specifically, non-wage utility accounts for approximately one-third of the total gains from job mobility. These large non-pecuniary gains from search are missed by search models which assume that the wage captures the entire value of a job to a worker.

Is Perfect Price Discrimination Really Efficient? An Analysis of Free Entry Equilibria

We analyze models of product differentiation with perfect price discrimination and free entry. Although perfect price discrimination ensures efficient output decisions given product characteristics, coordination failures may prevent efficiency in the choice of product characteristics. More fundamentally, even if we have efficient product choices for a fixed number of firms, one always has excessive entry in free entry equilibrium. Our results apply to a large class of models of product differentiation including location models as well as representative consumer models of the demand for variety. These results also apply to models of common agency or lobbying with free entry and imply that one has excessive entry into the ranks of lobbyists.

Antidumping, Signaling and Cheap Talk

In the United States, there is evidence that domestic non-filing firms do not always support dumping/countervailing duty investigations. Absent other factors, domestic firms have an unambiguous incentive to support petitions filed by other domestic producers. We argue that in cases where the non-complainant firm is not a significant importer or exporter, the most plausible explanation is that non-support acts as a costly signal of private information. Extending the model to allow firms to engage in cheap talk, such signaling can take place even in the absence of an investigation. This result provides an explanation for the puzzling observation that fewer antidumping investigations are filed than one would expect.

Strategic Resource Extraction, Capital Accumulation and Overlapping Generations

The standard resource extraction framework assumes infinitely lived agents and yields an overfishing result. For some applications, a finite time horizon may be more appropriate. A direct extension of the Levhari-Mirman model to overlapping generations yields an extreme overfishing result. Alternatively, we assume young and old specialize and respectively fish and supply capital. In this model, under some circumstances there may well be under-utilization of natural, renewable resources. However, for a given production technology, if there are a sufficiently large number of agents, overfishing always results.

Monopsonistic Competition in Formal and Informal Labor Markets

The workhorse of urban labor theory in development economics is the formal/informal model of labor market segmentation and its variants. The seminal Harris-Todaro model has been extended over the years to cope with various empirical puzzles not explained in the original framework. However, one issue stands out that cannot easily be explained in a competitive framework. Specifically, there is considerable evidence suggesting that many workers choose to work in the informal sector, even though formal sector jobs are available to them and despite the fact that wages are typically higher in the formal sector. One solution is to depart from the usual competitive framework and consider formal and informal labor markets under oligopsony/monopsonistic competition.

Minimum Wages, Employment and Monopsonistic Competition

We set out a model of monopsonistic competition, where each employer competes equally with every other employer. The employment effects of minimum wages depend on the degree of distortion in the labor market. If fixed costs per firm are high then the labor market is relatively non-competitive and minimum wages increase employment. Conversely, low fixed costs make for a more competitive labor market where minimum wages reduce employment. This contrasts with the results of a Salop style model with localized employer competition where a minimum wage unambiguously raises employment. We also find that the welfare effect of a small minimum wage is unambiguously positive.