Assortative Matching and Reputation

41 Pages Posted: 3 Feb 2006

See all articles by Axel Anderson

Axel Anderson

Georgetown University - Department of Economics

Lones Smith

University of Wisconsin at Madison - Department of Economics

Date Written: January 2006

Abstract

Consider Becker's 1973 classic 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.

Keywords: Supermodularity, assortative matching, learning

JEL Classification: C78, J41

Suggested Citation

Anderson, Axel and Smith, Lones, Assortative Matching and Reputation (January 2006). Cowles Foundation Discussion Paper No. 1553, Available at SSRN: https://ssrn.com/abstract=556156

Axel Anderson (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Lones Smith

University of Wisconsin at Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-263-3871 (Phone)
608-262-2033 (Fax)

HOME PAGE: http://www.lonessmith.com

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