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Assortative Matching and Reputation

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  • Axel Anderson

    (Economics Department, Georgetown University)

  • Lones Smith

    (Dept. of Economics, University of Michigan)

Abstract

Consider Becker's classic 1963 matching model, with unobserved fixed types and stochastic publicly observed output. If types are complementary, then matching is assortative in the known Bayesian posteriors (the 'reputations'). We discover a robust failure of Becker's result in the simplest dynamic two type version of this world. Assortative matching is generally neither efficient nor an equilibrium for high discount factors. In a labor theoretic rationale, we show that assortative matching fails around the highest (lowest) reputation agents for 'low-skill (high-skill) concealing' technologies. We then find that as the number of production outcomes grows, almost all technologies are of either form. Our theory implies the dynamic result that high-skill matches eventually break up. It also reveals that the induced information rents create discontinuities in the wage profile. This in turn produces life-cycle effects: young workers are paid less than their static marginal product, and old workers more.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1553.

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Length: 40 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Published in Review of Economic Studies (January 2010), 77(1): 3-29
Handle: RePEc:cwl:cwldpp:1553

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Keywords: assortative matching; incomplete information; wages; Bayesian posterior; value function;

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References

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  1. Hutchens, Robert M, 1987. "A Test of Lazear's Theory of Delayed Payment Contracts," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages S153-70, October.
  2. 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.
  3. Milton Harris & Bengt Holmstrom, 1981. "A Theory of Wage Dynamics," Discussion Papers 488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  5. Neil E. Gretsky & Joseph M. Ostroy & William R. Zame, 1990. "The Nonatomic Assignment Model," UCLA Economics Working Papers 605, UCLA Department of Economics.
  6. Burdett, Ken & Coles, Melvyn G, 1997. "Marriage and Class," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 141-68, February.
  7. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-20, September.
  8. Shimer, R. & Smith, L., 1997. "Assortative Matching and Search," Working papers 97-2a, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. 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..
  10. Muriel Niederle & Alvin E. Roth, 2004. "Market Culture: How Norms Governing Exploding Offers Affect Market Performance," Levine's Bibliography 122247000000000207, UCLA Department of Economics.
  11. Heski Bar-Isaac, 2004. "Something to Prove: Reputation in teams and hiring to introduce uncertainty," Working Papers 04-07, New York University, Leonard N. Stern School of Business, Department of Economics.
  12. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  13. Lones Smith, 2006. "The Marriage Model with Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1124-1146, December.
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Cited by:
  1. Costa, Luis Almeida e & Vasconcelos, Luis, 2008. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," FEUNL Working Paper Series wp539, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009. "The Theory of Assortative Matching Based on Costly Signals," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 253-281.
  3. Ximena Peña, . "Assortative Matching and the Education Gap," Borradores de Economia 427, Banco de la Republica de Colombia.
  4. Hector Chade & Greg Lewis & Lones Smith, 2006. "The College Admissions Problem Under Uncertainty," 2006 Meeting Papers 125, Society for Economic Dynamics.
  5. Alberto Naudon, 2010. "A Stochastic Assignment Model," Working Papers Central Bank of Chile 558, Central Bank of Chile.

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