Accounting For Asymmetric Information And Screening In Market Models Of The Loanable Funds And Labor Markets

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.