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Frictional Assignment, Part II: Infinite Horizon and Inequality

Author

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  • Shouyong Shi

    (University of Toronto)

Abstract

In an infinite-horizon economy with matching frictions, I study the efficient assignment between workers of different skill levels and machines of different quality levels. Under some restrictions I show that the efficient allocation assigns a unique machine quality and market tightness to each skill, and that the assignment is saddle-path stable. The efficient assignment is not necessarily positively assortative and efficient wages do not necessarily increase with the skill level. Nevertheless, the social value of workers always increases with the skill level. I then show that the efficient allocation can be decentralized by a market mechanism, in which the firms direct workers' search by announcing and committing to the machine quality, the skill level they intend to hire for such machines, and the time-path of wages. Finally, I calibrate the model to the US data and examine how a skill-biased technological progress affects the assignment and inequality. (Copyright: Elsevier)

Suggested Citation

  • Shouyong Shi, 2005. "Frictional Assignment, Part II: Infinite Horizon and Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 106-137, January.
  • Handle: RePEc:red:issued:v:8:y:2005:i:1:p:106-137
    DOI: 10.1016/j.red.2004.10.004
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    References listed on IDEAS

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    1. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
    2. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
    3. Shouyong Shi, 1998. "Frictional Assignment," Working Papers 988, Queen's University, Department of Economics.
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    Cited by:

    1. Jacquet, Nicolas L. & Tan, Serene, 2012. "Wage-vacancy contracts and coordination frictions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1064-1104.
    2. Allen Head & Hongfei Sun & Chenggang Zhou, 2016. "Default, Mortgage Standards and Housing Liquidity," Working Papers 1359, Queen's University, Department of Economics.
    3. Masters, Adrian, 2011. "Commitment, advertising and efficiency of two-sided investment in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1017-1031, July.

    More about this item

    Keywords

    Matching; Efficiency; Inequality; Skill Bias.;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D60 - Microeconomics - - Welfare Economics - - - General

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