Efficiency in a Matching Model with Heterogeneous Agents: Too Many Good or Bad Jobs?
Universidad Carlos III de Madrid
Universidad Carlos III de Madrid - Department of Economics; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 968
This paper analyses the efficiency of the equilibrium allocation in a matching model with two types of workers and jobs. The basic assumption is that high-skill workers can perform both skilled and unskilled jobs, while low-skill workers can only perform unskilled jobs. Our first result shows that the equilibrium with ex-post bargaining is never efficient. Second, under Hosios' (1990) condition we show that high-skill workers are under-valued in equilibrium, while the opposite holds for low-skill workers. Firms therefore tend to create too few unskilled jobs, resulting in a suboptimally high unemployment rate for low-skill workers. We show that these results generalize to environments with more types of agents and different production technologies. Finally, in an extension we derive a tax scheme that restores efficiency and we show how workers' bargaining strength affects unemployment and skill-mismatch.
Number of Pages in PDF File: 48
Keywords: matching, ex post bargaining, heterogeneity, efficiency
JEL Classification: C78, D61, J64
Date posted: January 13, 2004