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Frictional Assignment, Part II: Infinite Horizon and Inequality

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  • Shouyong Shi

    (University of Toronto)

Abstract

In an infinite-horizon economy with matching frictions, I study the efficient assignment between workers of different skill levels and machines of different quality levels. Under some restrictions I show that the efficient allocation assigns a unique machine quality and market tightness to each skill, and that the assignment is saddle-path stable. The efficient assignment is not necessarily positively assortative and efficient wages do not necessarily increase with the skill level. Nevertheless, the social value of workers always increases with the skill level. I then show that the efficient allocation can be decentralized by a market mechanism, in which the firms direct workers' search by announcing and committing to the machine quality, the skill level they intend to hire for such machines, and the time-path of wages. Finally, I calibrate the model to the US data and examine how a skill-biased technological progress affects the assignment and inequality. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.10.004
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 1 (January)
Pages: 106-137

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Handle: RePEc:red:issued:v:8:y:2005:i:1:p:106-137

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Related research

Keywords: Matching; Efficiency; Inequality; Skill Bias.;

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References

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  1. Shimer, R. & Smith, L., 1998. "Assortive Matching and Search," Papers 98-09, Michigan - Center for Research on Economic & Social Theory.
  2. Daron Acemoglu & Robert Shimer, 1998. "Holdups and Efficiency with Search Frictions," Working papers 98-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Michael Peters, 1998. "Limits of Exact Equilibria for Capacity Constrained Sellers with costlySearch," Working Papers peters-98-01, University of Toronto, Department of Economics.
  4. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  5. Kenneth Burdett & Shouyong Shi & Randall Wright, 1998. "Pricing with frictions," Working Papers 98-9, Federal Reserve Bank of Philadelphia.
  6. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
  7. repec:fth:starer:9816 is not listed on IDEAS
  8. Michael Peters & Aloysius Siow, 2002. "Competing Premarital Investments," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 592-608, June.
  9. Kenneth Burdett & Randall Wright, 1994. "Two-sided search," Staff Report 169, Federal Reserve Bank of Minneapolis.
  10. Peters, Michael, 1991. "Ex Ante Price Offers in Matching Games Non-steady States," Econometrica, Econometric Society, vol. 59(5), pages 1425-54, September.
  11. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  12. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  14. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  15. Boyan Jovanovic, 1998. "Vintage Capital and Inequality," NBER Working Papers 6416, National Bureau of Economic Research, Inc.
  16. Burdett, Ken & Coles, Melvyn G, 1997. "Marriage and Class," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 141-68, February.
  17. Robert Shimer, 2001. "The Assignment of Workers to Jobs In an Economy with Coordination Frictions," NBER Working Papers 8501, National Bureau of Economic Research, Inc.
  18. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
  19. Becker, Gary S, 1973. "A Theory of Marriage: Part I," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 813-46, July-Aug..
  20. Sattinger, Michael, 1995. "Search and the Efficient Assignment of Workers to Jobs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 283-302, May.
  21. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  22. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
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Cited by:
  1. Masters, Adrian, 2011. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1017-1031, July.

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