Job Matching with Subsidy and Taxation

Abstract

Governments often provide employers with financial incentives which depend on the sets of people they hire. Studying such fiscal policies in a classical job matching framework, we provide a necessary and sufficient condition for a policy to preserve the substitute condition (for all revenue functions satisfying it); this is crucial for equilibrium existence and stability. These policies are characterized by sums of additively separable and "cardinally concave" transfer functions. Then we characterize transfer functions that preserve the substitute condition for several important sub-classes of revenue functions: e.g., when doctors are homogeneous within groups. Implications for auction design are also discussed.

Keywords: job matching; gross substitutes condition; subsidy and taxation; transfer function; policy intervention; rural hospital

JEL Classification: C78; D47; D50; J20