Efficiency and specialization: A search theoretic approach

An extension of the traditional Roy model to incorporate the existence of search frictions is proposed. The efficiency of model is then tested under the existence of the standard Hosios condition. The results show that a new kind of externality which is related to the degree of job specialization arises and therefore Hosios condition fails to guarantee efficiency. Policies which subsidize employment and aim at job specialization of individuals, will equate the social with the private market outcome.

Research highlights► A random matching model with ex-post wage bargaining is developed. ► Workers differ in the degree of their specialization. ► Market equilibrium is inefficient under Hosios condition. ► An employment subsidy will restore efficiency. ► The same result can be obtained if individuals are fully specialized.