Scale Effects in Markets with Search

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 15.10.2002, 12:15 - 13:30


Presentation by 

Barbara Petrongolo (Queen Mary, University of London)


This paper tests for the presence of scale effects in markets with search frictions. It is theoretically plausible that scale effects exist in one or more aspects of the matching process, but may be offset by the optimal search strategies of firms and workers, and therefore are not picked up by reduced-form estimates of the matching function. We estimate a structural job search model on British data, letting both the arrival rate of job offers and the mean wage offer vary with personal worker characteristics and local market size, proxied by the number of existing job openings. We find evidence of scale effects in the mean wage offer. Such scale effects turn out to be largely offset by the endogenous response of worker reservation wages, so that larger markets tend to deliver higher realized wages rather than a faster exit rate from unemployment.

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