WAGE FORMATION IN A CENTRALIZED MATCHING MARKET

It is natural to ask why the market for interns in the U.S.A. has to b e cleared with a centralized matching procedure (the NRMP) and how thi s rationing procedure affects equilibrium wages. This paper presents a model in which a market failure is caused by insufficiently different iated wages. The NRMP solves the problem, but it enables the hospitals to extract more surplus from their interns than they could in an idea l competitive equilibrium. It is demonstrated that this distortion cau ses welfare losses if the hospitals can substitute between physicians and interns.