Faculty of Economics and Business Administration Publications Database

Capacity Constrained Firms in (Labor) Markets with Adverse Selection

Wambach, Achim
Volume: 19
Number: 3
Pages: 525 - 548
Month: April
ISSN-Print: 0938-2259
Year: 2002
Keywords: Adverse selection; Capacity constraints; Labor markets; Competitive equilibrium
Abstract: We discuss a competitive (labor) market where firms face capacity constraints and individuals differ according to their productivity. Firms offer two-dimensional contracts like wage and task level. Then workers choose firms and contracts. Workers might be rationed if the number of applicants exceeds the capacity of the firm. We show that under reasonable assumptions on the distribution of capacity an equilibrium in pure strategies (by the firms) exists. This result stands in contrast to the case of unlimited capacity. The utility level is uniquely determined in equilibrium. No rationing occurs in equilibrium, but it does off the equilibrium path.