Matchmaking Principals: Theory and Evidence from Internal Labor Markets
70 Pages Posted: 19 Apr 2021 Last revised: 27 Jul 2022
Date Written: April 5, 2021
A principal often needs to match agents together to perform coordinated tasks. However, agents can quit or slack off if they dislike their match. We study two approaches for matching agents, both widely used in practice: Centralized assignment by firm leaders and self-organization through market-like mechanisms. Our framework connects the choice of method to the firm's production technology, the degree of specialization in a firm's workforce, worker/CEO information asymmetry and incentive alignment. We then study these topics using data from a large organization's internal labor market. Using the organization's preferred metric of match quality, firm-dictated matches are 36% more valuable than randomly assigned matches within job categories. By contrast, preference-based matches (using deferred acceptance) are only 3% better than random but are ranked (on average) about 38 percentiles higher by the workforce. A key driver is the degree of assortative matching: The self-organized match is positively assortative, and the firm's preferred match is negatively assortative.
Keywords: internal labor markets, assortative matching, market design
JEL Classification: M5, D47, J4
Suggested Citation: Suggested Citation