Agents on the same side of a two-sided matching market (such as the marriage or labor market) compete with each other by making self-enhancing investments to improve their worth in the eyes of potential partners. Because these expenditures generally occur prior to matching, this activity has come to be known in recent literature (Peters, 2007) as pre-marital investment. This paper builds on that literature by considering the case of sequential pre-marital investment, analyzing a matching game in which one side of the market invests first, followed by the other. Interpreting the first group of agents as workers and the other group as firms, the paper provides a new perspective on the incentive structure that is inherent in labor markets. It also demonstrates that a positive rate of unemployment can exist even in the absence of matching frictions. Policy implications follow, as the prevailing set of equilibria can be altered by restricting entry into the workforce, providing unemployment insurance, or subsidizing pre-marital investment.
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number
2008-45.
Length: 27 pages Date of creation: Oct 2008 Date of revision: Handle: RePEc:uct:uconnp:2008-45
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Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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