SFB 303 Discussion Paper No. A-422

Author: Kamecke, Ulrich
Title: Wage Formation in a Centralized Matching Market
Abstract: For the last 40 years the market for medical interns has been cleared with the help of a central matching procedure, the NRMP. This mechanism is applied after the wages are determined. So it is natural to ask how such a rationing scheme affects the equilibrium wages in this market. I present a model in which a restriction on the flexibility of the price mechanism explains the market failure. Then I show that the NRMP generates an outcome which establishes some competitive pressure on the wages. Nevertheless, the hospitals are able to extract more surplus from their interns than they could in an ideal competitive equilibrium. This may cause welfare losses if the hospitals can substitute between physicians and interns. I present an example where the deficiencies of the matching market lead to an excessive employment of interns in the most attractive hospitals. This observation sheds new light on the discussion of the efficiency of centrally organized matching procedures. In particular it shows that the unattractive rural hospitals may have a good reason when they complain about their problems to attract interns.
Keywords: Matching Markets, market imperfections caused by central market organization.
JEL-Classification-Number: D78, L13
Creation-Date: November 1993
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