A BEJM Advances article.

Abstract

This paper explores the efficiency of decentralized search behavior and matching patterns in a model with ex ante heterogeneity and a constant returns to scale search technology. We show that a linear tax or subsidy on search intensity decentralizes the social optimum. In the absence of the tax, high productivity agents are too willing to match, yet they search too little. Low productivity agents have the opposite behavior. As a result, the equilibrium is always inefficient in the absence of taxes, in contrast to known results on the efficiency of decentralized search models with homogeneous agents. We relate the inefficiencies to thick-market and congestion externalities.

Submitted: October 16, 2000 · Accepted: December 29, 2000 · Published: April 30, 2001

Originally published in Advances in Macroeconomics.

Recommended Citation

Shimer, Robert and Smith, Lones (2001) "Matching, Search, and Heterogeneity," Advances in Macroeconomics: Vol. 1 : Iss. 1, Article 5.
Available at: http://www.bepress.com/bejm/advances/vol1/iss1/art5