Efficiency of thin and thick markets, by Li Gan and Qi Li

Here's the published version of a paper by Li Gan and Qi Li on why it's good to be in a thick market...

Journal of Econometrics

Volume 192, Issue 1, May 2016, Pages 40–54

Efficiency of thin and thick markets ^☆

• Li Gan^a, b, , 
• Qi Li^c, d, , 

doi:10.1016/j.jeconom.2015.10.012 

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Abstract

In this paper, we propose a matching model to study the efficiency of thin and thick markets. Our model shows that the probabilities of matches in a thin market are significantly lower than those in a thick market. When applying our results to a job search model, it implies that, if the ratio of job candidates to job openings remains (roughly) a constant, the probability that a person can find a job is higher in a thick market than in a thin market. We apply our matching model to the U.S. academic market for new PhD economists. Consistent with the prediction of our model, a field of specialization with more job openings and more candidates has a higher probability of matching.

1. Introduction

In this paper, we are interested in the following question: Compare two markets, one of which has five candidates and five openings in five firms (each firm has one opening), and the other of which has fifty candidates and fifty openings. Which market has a lower average unemployment rate or a higher probability of successful match? The market with a lower unemployment rate is said to be more efficient than the one with a higher unemployment rate.