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Accounting for Asymmetric Information and Screening in Market Models of the Loanable Funds and Labor Markets

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  • S. Kirk Elwood

Abstract

The loanable funds and labor markets are two important markets in macroeconomics where asymmetric information is inherent and, in response, effective forms of screening have developed and become established. But many macroeconomic textbooks rely on the standard market model to characterize these markets despite its weakness at accounting for their information issues. This article suggests a simple modification to the usual market approach that acknowledges the sophisticated screening that has arisen in response to the asymmetric information of these markets. The resulting model improves upon the standard model by capturing clearly observed forms of credit rationing in the loanable funds market and unemployment in the labor market.

Suggested Citation

  • S. Kirk Elwood, 2017. "Accounting for Asymmetric Information and Screening in Market Models of the Loanable Funds and Labor Markets," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 17(1), pages 14-24, Spring.
    • Handle: RePEc:mts:jrnlee:v:17:y:2017:i:1:p:14-24
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    File URL: http://capone.mtsu.edu/jee/2017/pp14-24MS116final.pdf
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    References listed on IDEAS

    as
    1. Summers, Lawrence H, 1988. "Relative Wages, Efficiency Wages, and Keynesian Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 383-388, May.
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    3. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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    More about this item

    Keywords

    asymmetric information; screening; credit rationing; unemployment;
    All these keywords.

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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