We discuss a competitive (labor) market where firms face capacity constraints and individuals differ according to their productivity.
Firms offer two-dimensional contracts like wage and task level. Then workers choose firms and contracts. Workers might be
rationed if the number of applicants exceeds the capacity of the firm.
We show that under reasonable assumptions on the distribution of capacity an equilibrium in pure strategies (by the firms)
exists. This result stands in contrast to the case of unlimited capacity. The utility level is uniquely determined in equilibrium.
No rationing occurs in equilibrium, but it does off the equilibrium path.
Keywords and Phrases: Adverse selection, Capacity constraints, Labor markets, Competitive equilibrium.
JEL Classification Numbers: C72, C78, D43, D82.
Received: December 29, 1999; revised version: November 30, 2000