Working Paper Revision

An Information-based Theory of Monopsony Power

Abstract: We develop an information-based theory of monopsony power that unifies search frictions and job differentiation by endogenizing worker search and firm screening through rational inattention. The model yields a closed-form wage equation that decomposes the sources of monopsony power and nests directed and random search as limiting cases. The framework reconciles strong assortative matching with flat wage-productivity profiles, large wage markdowns with small firm wage effects, and high estimated labor supply elasticities with substantial monopsony power. Estimating the model on a matched employer-employee dataset, we find that firms drive sorting through selective screening while compressing wages toward workers' outside options.

JEL Classification: J42;

https://doi.org/10.20955/wp.2025.026

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2026-09-29

Number: 2025-026

Related Works

• Working Paper Revision (2026-09-29) : You are here.
• Working Paper Original (2025-09-30) : An Information-based Theory of Monopsony Power