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Mis-match, Re-match, and Investment

  • Thomas Gall

    (Boston University and University of Bonn)

  • Patrick Legros

    (ECARES, Universit´e Libre de Bruxelles and CEPR)

  • Andrew F. Newman

    (Boston University and CEPR)

Mobility depends essentially on investment, which often occurs in environments in which individuals match (school) or will match after investing (the labor market). Where partners can transfer surplus to each other only imperfectly (NTU), the pattern of matching will typically be inefficient, involving too much segregation, and providing a possible rationale for ”associational redistribution” such as affirmative action: a social planner who could enforce a matching outcome that differs from the market outcome may raise aggregate social surplus. We show that this static inefficiency due to NTU can be exacerbated in a dynamic environment in which individuals’ productive types are determined by investments made before they match. In contrast to TU models there will typically be investment distortions, with high types over-investing and low types under-investing. We study several forms of associational redistribution, assessing the differential effects of achievement-based and background-based polices; early-stage and later-stage policies; and interactions between them.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-189.

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Length: 47
Date of creation: May 2009
Date of revision:
Handle: RePEc:bos:iedwpr:dp-189
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  1. Hoppe, Heidrun C. & Moldovanu, Benny & Sela, Aner, 2006. "The Theory of Assortative Matching Based on Costly Signals," CEPR Discussion Papers 5543, C.E.P.R. Discussion Papers.
  2. Steven N. Durlauf, 1992. "A Theory of Persistent Income Inequality," NBER Working Papers 4056, National Bureau of Economic Research, Inc.
  3. Patrick Legros & Andrew F. Newman, 2002. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-149, Boston University - Department of Economics, revised Nov 2004.
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  10. Roland G. Fryer Jr. & Glenn C. Loury, 2005. "Affirmative Action and Its Mythology," Journal of Economic Perspectives, American Economic Association, vol. 19(3), pages 147-162, Summer.
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  16. Hong, Lu & Page, Scott E., 2001. "Problem Solving by Heterogeneous Agents," Journal of Economic Theory, Elsevier, vol. 97(1), pages 123-163, March.
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