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Non-cooperative foundations of hedonic equilibrium

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  • Peters, Michael

Abstract

This paper studies Bayesian equilibrium in a worker firm matching problem in which workers choose their human capi- tal investment and firms choose wages before the matching process occurs. Symmetric equilibrium exists, and supports assortative matching. However, when the number of traders is large, low types tend to invest too much, while higher types invest in a way that is bilaterally efficient. In this sense the upper end of the market be- haves in a manner that is similar to the way they would behave in a competitive (hedonic) equilibrium. The lower end of the market, however, does not. All types end up investing more and being paid higher wages than they are in a simple hedonic equilibrium. In the limit, the Bayesian game supports and outcome that looks like a Truncated Hedonic Equilibrium as described in Peters (2006).

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File URL: http://montoya.econ.ubc.ca/mike/foundations_hedonic_2.pdf
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Bibliographic Info

Paper provided by Vancouver School of Economics in its series Microeconomics.ca working papers with number peters-07-12-10-02-47-06.

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Length: 20 pages
Date of creation: 10 Dec 2007
Date of revision: 06 Jun 2008
Handle: RePEc:ubc:pmicro:peters-07-12-10-02-47-06

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Web page: http://www.economics.ubc.ca/

Related research

Keywords: bayesian equilibrium; pre-match investment; assortative matching;

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  1. Michael Peters & Aloysius Siow, 2000. "Competing Pre-marital Investments," Working Papers peters-00-01, University of Toronto, Department of Economics.
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