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Truncated Hedonic Equilibrium

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  • Peters, Michael

Abstract

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.

Suggested Citation

  • Peters, Michael, 2006. "Truncated Hedonic Equilibrium," Microeconomics.ca working papers peters-06-04-11-02-42-39, Vancouver School of Economics, revised 03 Mar 2009.
  • Handle: RePEc:ubc:pmicro:peters-06-04-11-02-42-39
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    File URL: http://montoya.econ.ubc.ca/mike/truncated_hedonic.pdf
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    References listed on IDEAS

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    1. 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, April.
    2. Jeremy Bulow & Jonathan Levin, 2006. "Matching and Price Competition," American Economic Review, American Economic Association, vol. 96(3), pages 652-668, June.
    3. 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.
    4. Michael Peters & Aloysius Siow, 2002. "Competing Premarital Investments," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 592-608, June.
    5. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
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    Cited by:

    1. V. Bhaskar & Ed Hopkins, 2016. "Marriage as a Rat Race: Noisy Premarital Investments with Assortative Matching," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 992-1045.
    2. Jerez, Belén, 2017. "Competitive search equilibrium with multidimensional heterogeneity and two-sided ex-ante investments," Journal of Economic Theory, Elsevier, vol. 172(C), pages 202-219.

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    More about this item

    Keywords

    assortative matching; ex ante investment; hedonic; competitive;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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