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Inefficient sorting under output sharing

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  • Lam, Wing Tung

Abstract

I study sorting in a frictional market. Asset owners post their terms, then workers direct their search. When the owners switch from prices to shares, the competition between workers is handicapped. The unique equilibrium features inefficient positive assortative matching. The queue lengths are distorted, even though the Hosios efficiency condition holds for every pair of types. For any distribution of types, all workers pair up with better assets. The best workers suffer while the weakest workers gain; the opposite occurs on the asset side. Competition drives the asset owners to post flatter contracts. It leads to constrained efficiency whenever prices are feasible. Otherwise, handicapped competition results in inefficient sorting.

Suggested Citation

  • Lam, Wing Tung, 2020. "Inefficient sorting under output sharing," Journal of Economic Theory, Elsevier, vol. 187(C).
    • Handle: RePEc:eee:jetheo:v:187:y:2020:i:c:s0022053120300351
    DOI: 10.1016/j.jet.2020.105031
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    More about this item

    Keywords

    Assortative matching; Sorting; Directed search; Hosios condition; Linkage principle; Linear contracts;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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