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Assortative Matching and Reputation

Author

Listed:
  • Axel Anderson

    (Economics Department, Georgetown University)

  • Lones Smith

    (Dept. of Economics, University of Michigan)

Abstract

Consider Becker's classic 1963 matching model, with unobserved fixed types and stochastic publicly observed output. If types are complementary, then matching is assortative in the known Bayesian posteriors (the 'reputations'). We discover a robust failure of Becker's result in the simplest dynamic two type version of this world. Assortative matching is generally neither efficient nor an equilibrium for high discount factors. In a labor theoretic rationale, we show that assortative matching fails around the highest (lowest) reputation agents for 'low-skill (high-skill) concealing' technologies. We then find that as the number of production outcomes grows, almost all technologies are of either form. Our theory implies the dynamic result that high-skill matches eventually break up. It also reveals that the induced information rents create discontinuities in the wage profile. This in turn produces life-cycle effects: young workers are paid less than their static marginal product, and old workers more.

Suggested Citation

  • Axel Anderson & Lones Smith, 2006. "Assortative Matching and Reputation," Cowles Foundation Discussion Papers 1553, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1553
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d15/d1553.pdf
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    References listed on IDEAS

    as
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    2. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
    3. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
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    5. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
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    9. Chade, Hector, 2006. "Matching with noise and the acceptance curse," Journal of Economic Theory, Elsevier, vol. 129(1), pages 81-113, July.
    10. Lones Smith, 2006. "The Marriage Model with Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1124-1146, December.
    11. Ken Burdett & Melvyn G. Coles, 1997. "Marriage and Class," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 141-168.
    12. Milton Harris & Bengt Holmstrom, 1982. "A Theory of Wage Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(3), pages 315-333.
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    Citations

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    Cited by:

    1. Luís Almeida Costa & Luís Vasconcelos, 2010. "Share the Fame or Share the Blame? The Reputational Implications of Partnerships," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 259-301, June.
    2. Heidrun C. Hoppe & Benny Moldovanu & Aner Sela, 2009. "The Theory of Assortative Matching Based on Costly Signals," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(1), pages 253-281.
    3. Alberto Naudon, 2010. "A Stochastic Assignment Model," Working Papers Central Bank of Chile 558, Central Bank of Chile.
    4. Ximena Peña, 2006. "Assortative Matching and the Education Gap," Borradores de Economia 2032, Banco de la Republica.
    5. Hector Chade & Greg Lewis & Lones Smith, 2006. "The College Admissions Problem Under Uncertainty," 2006 Meeting Papers 125, Society for Economic Dynamics.

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    More about this item

    Keywords

    assortative matching; incomplete information; wages; Bayesian posterior; value function;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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