Incomplete Mechanisms and Efficient Allocation in Labour Markets

Abstract

Efficiency is analyzed in a Walrasian model of labour markets with adverse selection. Workers are distinguished by productivity and preferences; firms are distinguished by productivity and ability to distinguish workers. An equilibrium is defined to be constrained efficient if it cannot be dominated by an incomplete mechanism (IM). The set of equilibria turns out to have an interesting structure. Within the class of strongly monotonic economies, there exists at least one efficient equilibrium. Under slightly stronger conditions, an equilibrium is dominated by an IM only if it can be dominated by another equilibrium, that is, equilibria are Pareto-ranked.