Abstract
In the context of entry‐level labor markets, we consider the potential transactions that have to be evaluated before equilibrium transactions can be identified. These potential transactions involve offers that are rejected. After an initial phase in which many offers can be proffered in parallel, subsequent potential transactions must be processed serially, since a new offer cannot be made until an outstanding offer is rejected. In many, perhaps most, decentralized labor markets, this means that transactions have to be finalized before there is time for the market to clear, that is, before all the potential transactions that would need to be evaluated in order to reach a stable outcome can in fact be evaluated. This has implications for the strategic behavior of firms and workers. In particular, in deciding to whom to offer a position, a firm may have strong incentives to consider not only its preferences over workers but also the likelihood that its offer will be accepted, since if its offer is rejected ...
Highlights
In the context of entry-level labor markets, we consider the potential transactions that have to be evaluated before equilibrium transactions can be identified
Perhaps most, decentralized labor markets, this means that transactions have to be finalized before there is time for the market to clear, that is, before all the potential transactions that would need to be evaluated in order to reach a stable outcome can be evaluated
Even the extremely short turnaround times characteristic of the entry-level market for clinical psychologists can cause bottlenecks, which impede market clearing and promote strategic behavior. This is robust to changes in the correlation of preferences and in the concentration of positions, and seems likely to have implications for other labor markets but for markets generally
Summary
In Roth and Xing (1994) we argued that one function of a market is to establish a time at which large numbers of buyers and sellers can plan to make transactions, but that establishing such a time can be difficult. Roth (1984, 1991) showed that the algorithms used in a number of the successful centralized market-clearing mechanisms are approximately the same as the deferred acceptance procedure first formally studied by Gale and Shapley (1962). Their procedure produces a matching of job seekers to jobs that is stable in terms of the submitted preferences in the sense that no student and hospital that are not matched to each other would prefer to be so matched.. This in turn has implications for the strategies and incentives facing the participants
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