Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models

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This paper shows that market economies with search and in which wages are affected by efficiency wage considerations are not constrained Pareto efficient. Wages are not set at Pareto efficient levels, nor is the level of employment (unemployment) Pareto efficient. We identify the nature of the biases and the welfare improving government interventions.

Published: The American Economic Review, Vol. 78, No. 2, pp. 351-355, (May 1988).

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