Truncated Hedonic Equilibrium
Workers and firms in a bilateral matching market offer wages and human capital investments then match assortatively. The hedonic or competitive solution for this model has the undesirable property that in order to support the equilibrium, the worst workers and firms must misunderstand the consequences of reducing their investments. This paper proposes an alternative to the competitive solution in which the worst workers' and firms' conjectures about the consequences of reducing their investments coincide with consequences they would face in a Nash equilibrium of a large finite matching game. The resulting equilibrium induces the worst types of workers and firms to pool their investments at a level that exceeds the competitive level. This pooling supports sorting among higher types at investments and wages that are at least as high as in the competitive solution. Under some conditions the worst types exert a strong spillover effect on the higher types. We show that entry of low quality firms can depress wages and investment levels of high quality firms and workers, a kind of Wal-Mart effect.
|Date of creation:||11 Apr 2006|
|Date of revision:||03 Mar 2009|
|Contact details of provider:|| Web page: http://www.economics.ubc.ca/|
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- Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009.
"The Theory of Assortative Matching Based on Costly Signals,"
Review of Economic Studies,
Oxford University Press, vol. 76(1), pages 253-281.
- 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.
- Hoppe, Heidrun C. & Moldovanu, Benny & Sela, Aner, 2005. "The Theory of Assortative Matching Based on Costly Signals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 85, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Bulow, Jeremy I. & Levin, Jonathan, 2003.
"Matching and Price Competition,"
1818, Stanford University, Graduate School of Business.
- Jeremy Bulow & Jonathan Levin, 2005. "Matching and Price Competition," NBER Working Papers 11506, National Bureau of Economic Research, Inc.
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- Ed Hopkins, 2012.
"Job Market Signaling Of Relative Position, Or Becker Married To Spence,"
Journal of the European Economic Association,
European Economic Association, vol. 10(2), pages 290-322, 04.
- Ed Hopkins, 2005. "Job Market Signalling of Relative Position, or Becker Married to Spence," ESE Discussion Papers 134, Edinburgh School of Economics, University of Edinburgh.
- Ed Hopkins, 2006. "Job Market Signalling of Relative Position, or Becker Married to Spence," Levine's Bibliography 321307000000000553, UCLA Department of Economics.
- Michael Peters & Aloysius Siow, 2001.
"Competing Premarital Investment,"
peters-01-02, University of Toronto, Department of Economics.
- Han, Seungjin, 2006.
"Menu theorems for bilateral contracting,"
Journal of Economic Theory,
Elsevier, vol. 131(1), pages 157-178, November.
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