Ranking and Search Effort in Matching

Authors: Joonbae Lee and Hanna Wang

Economic Theory, September, 2021

This paper studies the relationship between search effort and workers’ ranking by employers. In order to do so, we propose a matching model in which employers have common preferences over a continuum of heterogeneous workers who choose a number of applications to send out. We show that in equilibrium, the relationship is hump-shaped for sufficiently high vacancy-to-worker ratios, that is, highly-ranked and lowly-ranked workers send out fewer applications than workers of mid-range rank. This arises due to two opposing forces driving the incentives of applicants. Increasing the number of applications acts as insurance against unemployment, but is less effective when the probability of success for each application is low. This mechanism exacerbates the negative employment outcomes of low-rank workers—hence, in contrast to the market equilibrium, in the social planner’s solution, the number of applications monotonically decrease in rank.

This paper originally appeared as Barcelona School of Economics Working Paper 1242