Search theory

In microeconomics, search theory studies buyers or sellers who cannot instantly find a trading partner, and must therefore search for a partner prior to transacting.

Search theory has been influential in many areas of economics. It has been applied in labor economics to analyze frictional unemployment resulting from job hunting by workers. In consumer theory, it has been applied to analyze purchasing decisions. From a worker's perspective, an acceptable job would be one that pays a high wage, one that offers desirable benefits, and/or one that offers pleasant and safe working conditions. From a consumer's perspective, a product worth purchasing would have sufficiently high quality, and be offered at a sufficiently low price. In both cases, whether a given job or product is acceptable depends on the searcher's beliefs about the alternatives available in the market.

More precisely, search theory studies an individual's optimal strategy when choosing from a series of potential opportunities of quality, under the assumption that delaying choice is costly. Search models illustrate how best to balance the cost of delay against the value of the option to try again. Mathematically, search models are optimal stopping problems.

Macroeconomists have extended search theory by studying general equilibrium models in which one or more types of searchers interact. These macroeconomic theories have been called 'matching theory', or 'search and matching theory'.

George J. Stigler proposed thinking of searching for bargains or jobs as an economically important problem.John J. McCall proposed a dynamic model of job search, based on the mathematical method of optimal stopping, on which much later work has been based. McCall's paper studied the problem of which job offers an unemployed worker should accept, and which reject, when the distribution of alternatives is known and constant, and the value of money is constant. Holding fixed job characteristics, he characterized the job search decision in terms of the reservation wage, that is, the lowest wage the worker is willing to accept. The worker's optimal strategy is simply to reject any wage offer lower than the reservation wage, and accept any wage offer higher than the reservation wage.

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