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  • Luca Paolo Merlino (a1)


This paper studies how search externalities and wage bargaining distort vacancy creation and the allocation of workers to jobs in markets with two-sided heterogeneity. To do so, I propose a model of a frictional labor market where heterogeneous workers decide which job to look for and firms decide which technology to adopt. At equilibrium, there is perfect segmentation across sectors, which is determined by a unique threshold of workers' productivity. This threshold is inefficient because of participation and composition externalities. The Pigouvian tax scheme that decentralizes optimal sorting shows that these externalities have opposite signs. Furthermore, their relative strength depends on the distribution of workers' skills, so that when there are many (few) skilled workers, too many (few) high-technology jobs are created.


Corresponding author

Address correspondence to: Luca Paolo Merlino, ECARES, Solvay Brussels School of Economics and Management, Université libre de Bruxelles, 50 Avenue F.D. Roosevelt, CP-114-04, 1050 Brussels, Belgium; e-mail:


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Macroeconomic Dynamics
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