An Incentive Theory of Matching

Abstract

An Incentive Theory of MatchingThis paper presents a theory explaining the labor market matching process through microeconomic incentives. There are heterogeneous variations in the characteristics of workers and jobs, and firms face adjustment costs in responding to these variations. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. This approach obviates the need for a matching function. On this theoretical basis, we argue that the matching function is vulnerable to the Lucas critique. Our calibrated model for the U.S. economy can account for important empirical regularities that the conventional matching model cannot. JEL Classification:E24, E32, J63, J64

The Intensive Margin Puzzle and Labor Market Adjustment Costs

“…For this reason, we relate lay-o¤ costs directly to the workers productivity, as the wage will also depend on macroeconomic variables. 2 To incorporate hours adjustment costs into our model, we assume that the …rm has to pay a cost if hours deviate from its steady state value (which is calibrated to be eight hours per day).…”

“…2 Here, we assume that lay-o¤ costs are linear in idiosyncratic productivity. This assumption is supported by the …nding from Abowd and Kramarz (2003) showing that in France separation costs are mildly concave in the number of exits.…”

Endogenous Ranking in the Two-Sector Urn-Ball Matching Process

“…Recently, the issue of their micro-foundation has attracted some researchers' attention. Among others, [4] and [5] highlight that the assumed function should be consistent with labor market behavior of firms and workers. Furthermore, [6] and [7] show that agents' behavior can be affected by labor market policies and institutions so that the matching function turns out to be endogenous.…”

“…Crucially, this depends on the distribution of θ within individuals that decide to acquire education s, on the relative markets' tightness, and on firm's distance to the technological frontier (Equation (27)). At the same time, worker's decision of investing in education s 5 This assumption allows for the identification of a unique BNE and it is similar to the assumption made by [10] in order to discuss the existence of a steady-state in a dynamic urn-ball process with ranking, i.e., the economy should operate always around its hypothetical steady-state. As already pointed out, the BNE gives a measure of the tightness of the two sectors.…”

The minimum wage from a two-sided perspective

“…We use the dynamic incentive model by Brown et al (2014) containing twosided selection in the labor market. In the context of conventional calibrations, this model fares better than the standard search and matching model in reproducing the volatilities of major labor market variables.…”