Temporary Agency Work and Labor Misallocation

user firms has received limited theoretical attention. This paper seeks to address this gap byfocusing on temporary agency work. We develop a two-period search model in which firmscan hire workers directly or through a temporary work agency (TWA). The agency acts asa matchmaker, providing flexibility by spreading termination risks across firms and certifyingassignment quality through worker screening. However, it faces a trade-off between creatingproductive matches and retaining control over workers for future placements. In equilibrium, thisresults in inefficient assignments, prolonged TWA employment spells, and lower transition ratesto stable jobs, ultimately reducing overall productivity. Distortions are amplified when wages indirect-hire jobs are set through Nash bargaining rather than directed search. Although transferpayments from firms poaching TWA workers could, in principle, mitigate these distortions, suchtransfers are often restricted by labor regulations. The model predicts that TWA employmentis particularly relevant for low-skilled workers, a finding supported by empirical evidence fromcountries like Spain. Furthermore, it predicts that these low-skilled workers are more likely tobecome trapped in inefficient job assignments. Drawing on Spanish administrative data, wedocument both poaching and misallocation among workers employed through TWAs. Buildingon these findings, we simulate a calibrated model that replicates key features of the data