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A Stochastic Assignment Model

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  • Alberto Naudon

Abstract

In this article I study a dynamic stochastic extension of the “differential rents” model of Sattinger (1979) that generates endogenous mismatch in equilibrium. I depart from the standard assignment literature in assuming that agents’ characteristics may change over time and that re-matching is feasible but costly. I show that, when agent characteristics are stochastic, rigidities that prevent partners from re-matching may change the matching outcome, even if the level of output continues to satisfy monotone differences in type. I construct and prove the existence of an equilibrium characterized by (i) a positive assortative matching between agents that decide to re-match and (ii) bands of inaction for existing matches.

Suggested Citation

  • Alberto Naudon, 2010. "A Stochastic Assignment Model," Working Papers Central Bank of Chile 558, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:558
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_558.pdf
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    References listed on IDEAS

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