Asymmetric information, search theory and some commonly observed phenomena

Rohit Verma, University of Pennsylvania


In the first chapter of my dissertation I use a two-sided search model to show that firms' beliefs regarding worker quit rates can be self-fulfilling even when there are no differences between groups of workers. If worker quits are costly for firms and firms have imperfect information about the quit propensity of specific workers, they will use the worker's group characteristics in their hiring decisions. Suppose firms believe that certain types of workers quit at a rate higher than the rest. Firms are then less likely to hire these workers. Consequently, opportunities are slow in arriving for these "high quit" workers and they respond by being less selective in accepting jobs. Therefore, once at a job they are more likely to prefer alternative opportunities. So even though these workers receive fewer job opportunities, they may quit more often since they are more likely to accept future offers. Employer beliefs are then self-fulfilling. This result of symmetric agents facing systematically asymmetric outcomes in a two-sided search model is of independent theoretical interest. Another important feature of this result is that discrimination takes place despite groups of workers being ex-post identical from the point of view of economic fundamentals. This is in sharp contrast to conventional models of statistical discrimination. In the second chapter, I give conditions under which a multi-cluster equilibrium of firms exists. Retailers selling similar products should not want to concentrate geographically since more sellers compete for each consumer that shops at that particular location. However, under consumers' imperfect information and the need to undertake costly search to obtain the best product variety, a geographical concentration of firms provides the best setting for search. It may then be in the best interest of firms to locate close to others to take advantage of the higher aggregate demand at that location. This paper provides sufficient conditions for the existence of a symmetric two-cluster equilibrium. The disincentive to further agglomerate is shown to depend on the distribution of consumer search costs and the number of firms in the market.

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Recommended Citation

Verma, Rohit, "Asymmetric information, search theory and some commonly observed phenomena" (1995). Dissertations available from ProQuest. AAI9543152.