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Truncated Hedonic Equilibrium

  • Peters, Michael

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.

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Paper provided by Vancouver School of Economics in its series working papers with number peters-06-04-11-02-42-39.

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Length: 25 pages
Date of creation: 11 Apr 2006
Date of revision: 03 Mar 2009
Handle: RePEc:ubc:pmicro:peters-06-04-11-02-42-39
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  1. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
  2. Ed Hopkins, 2006. "Job Market Signalling of Relative Position, or Becker Married to Spence," Levine's Bibliography 321307000000000553, UCLA Department of Economics.
  3. Michael Peters & Aloysius Siow, 2001. "Competing Premarital Investment," Working Papers peters-01-02, University of Toronto, Department of Economics.
  4. 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.
  5. Jeremy Bulow & Jonathan Levin, 2006. "Matching and Price Competition," American Economic Review, American Economic Association, vol. 96(3), pages 652-668, June.
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