Matching models with incomplete information
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School of Business |
Master's thesis
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Date
2021
Department
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Mcode
Degree programme
Economics
Language
en
Pages
60
Series
Abstract
Two-sided matching is the study of how members of one population form pairs with members of another. The best agents of each population are the scarce resources that the other side of the market seeks. There are many branches of matching theory. Matching models can be divided based on whether they deal with non-transferable utility or transferable utility, many-to-1 matching or 1-to-1 matching. This thesis focuses on the literature of matching models with transferable utility and 1-to-1 matching. An example of matching with such features is the labor market where each firm can pair with only one worker and vice versa. In this market, employment contracts specify 1-to-1 matches between workers and firms. Wages are the monetary transfers indicating the relative bargaining power of matching agents. This thesis aims to provide a literature review of matching models with incomplete information. Matching models (also known as assignment models in some papers) have a distinctive premise that individual performances vary from job to job. In matching models, job assignments are the equilibrium outcome of interactions between workers and firms. With complete information and a supermodular production function, the stable matching pattern in equilibrium is positive assortative matching, which means matching the best worker with the best firm, the second-best worker with the second-best firm, and so on. With incomplete information, agents might deviate from positive assortative matching even when the production function exhibits supermodularity. Each matching model presented in this thesis uses a different production technology and a distinct assignment mechanism to incorporate informational frictions such as reputation (Anderson and Smith, 2010), search costs (Shimer and Smith, 2000), and costly signals (Hoppe et al., 2009). Transfers (or wages) are at the heart of matching models with transferable utility. In the frictionless matching model, the law of one price dictates that similar workers receive a unique equilibrium wage. It implies that workers’ abilities alone determine their wages: better workers receive higher wages. Besides matching patterns, we will also examine frictional wage dispersion. Frictional wage dispersion happens when similar workers receive different wages because of informational frictions.Description
Thesis advisor
Terviö, MarkoKeywords
maching models, assignment models, incomplete information, frictional wage dispersion