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Choosing Sides in a Two-Sided Matching Market

Author

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  • Zhou Kit

    (Department of Economics, Michigan State University, East Lansing, MI, USA)

Abstract

I model a competitive labor market in which agents of different skill levels decide whether to enter the market as a manager or as a worker. After roles are chosen, a two-sided matching market is realized and a cooperative assignment game occurs. There exists a unique rational expectations equilibrium that induces a stable many-to-one matching and wage structure. Positive assortative matching occurs if and only if the production function exhibits a condition that I call role supermodularity, which is stronger than the strict supermodularity condition commonly used in the matching literature because a high skilled agent with a role choice is only willing to enter the market as a worker if she expects that it is more profitable to cluster with only other high skilled agents than to exclusively manage. The wage structure in equilibrium is consistent with empirical evidence that the wage gap is driven both by increased within-firm positive sorting as well as between-firm segregation.

Suggested Citation

  • Zhou Kit, 2023. "Choosing Sides in a Two-Sided Matching Market," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 23(2), pages 781-807, June.
    • Handle: RePEc:bpj:bejtec:v:23:y:2023:i:2:p:781-807:n:11
    DOI: 10.1515/bejte-2022-0126
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    assignment problems; two-sided matching; wage inequality;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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