Commitment, advertising and e¢ ciency of two-sided investment in competitive search equilibrium

Competitive search entails both commitment to and advertising of pay-o¤ relevant aspects of market participants. This paper considers incrementally the implications of each in a labor market where both workers and …rms invest prior to market entry. A wide range of institutional arrangements are addressed within the same general framework. When the characteristics of jobs or workers are advertised the e¢ cient outcome pertains. Commitment without advertising typically leads to market unravelling: the Diamond paradox. But, whenever wages and human capital are advertised, …rms become residual claimants; the private and social returns to investment coincide. Absent wage commitment, the Hosios condition implies e¢ ciency when investments are advertised. JEL code: J64 Key Word: Competitive Search. 1400 Washington Avenue, Room BA109, Albany, New York, 12222, USA. Phone: (518)437-4418, Fax: (518)442-4736, e-mail: [email protected]