Learning Through Search

We consider a search and matching model, in which the two parties in the market are uncertain about their own quality. The uncertainty is in general persistent, but agents learn about their quality over time as they interact... [ view full abstract ]

We consider a search and matching model, in which the two parties in the market are uncertain about their own quality. The uncertainty is in general persistent, but agents learn about their quality over time as they interact with the agents from the other side. For the match only the quality of the partner matters for an agent's payoff. In the asymmetric version of our model firms arrive at random times, observe a worker's type and either make a proposal or not. When a worker receives a proposal, he observes the firm's type and decides whether or not to accept the proposal. Once a match is formed, both agents leave the market. We vary the model along two dimensions: uncertainty about the type and who has the right to make a proposal. We analyse the set of equilibria for each regime. Once we allow for proposals from both workers and firms a new phenomenon arises, which is akin to a bid-ask spread: The belief at which a proposal is made to a low type differs from the belief at which a proposal from a low type is accepted.