On the Efficiency of Job Search with Social Networks
Pierre Cahuc, Francois Fontaine
published in: Journal of Public Economic Theory, 2009, 11 (3), 411–439
This paper provides a simple matching model in which unemployed workers and employers
can be matched together through social networks and through more efficient, but also more
costly, methods. In this framework, decentralized decisions to utilize social networks in the
job search process can be inefficient and give rise to multiple equilibria for some parameters
values. More precisely, in a decentralized equilibrium, social networks can be over-utilized,
with respect to an efficient allocation, in some circumstances and under-utilized in others.
Moreover, the existence of different job search methods can give rise to a higher job search
intensity than the efficient one. This is in sharp contrast with the standard result, derived in
matching models, according to which search intensity is always too low if not efficient.
Eventually, in the presence of different job search methods, conditional unemployment
benefits hikes can improve welfare when individuals are risk neutral.
Text: See Discussion Paper No. 583