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Too good to fire: Non-assortative matching to play a dynamic game

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  • Sperisen, Benjamin
  • Wiseman, Thomas

Abstract

We model stable, non-assortative labor-market matchings. We endogenize how transferable utility is: a matched firm and worker play an infinite-horizon game with one-sided moral hazard. Becker's (1973) result that complementarity yields positively assortative matching fails, because increasing match quality harms dynamic incentives: a firm cannot credibly threaten to fire a worker who is productive even with low effort. Thus, firms may prefer lower-type workers who will exert more effort. We offer a new interpretation of efficiency wages: committing to a high wage improves effort incentives indirectly by increasing the firm's willingness to walk away. We also show that the set of stable outcomes has a lattice structure.

Suggested Citation

  • Sperisen, Benjamin & Wiseman, Thomas, 2020. "Too good to fire: Non-assortative matching to play a dynamic game," Games and Economic Behavior, Elsevier, vol. 124(C), pages 491-511.
    • Handle: RePEc:eee:gamebe:v:124:y:2020:i:c:p:491-511
    DOI: 10.1016/j.geb.2020.09.011
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    Matching; Dynamic games;

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