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AN INCENTIVE THEORY OF MATCHING

Published online by Cambridge University Press:  23 October 2013

Alessio Brown ,
Christian Merkl  and
Dennis Snower
Alessio Brown
Affiliation:
Kiel Institute for the World Economy
Christian Merkl*
Affiliation:
Friedrich-Alexander-University Erlangen-Nürnberg and Kiel Institute for the World Economy
Dennis Snower
Affiliation:
Kiel Institute for the World Economy and Christian-Albrechts-University Kiel
*
Address correspondence to: Christian Merkl, Friedrich-Alexander-Universität Erlangen-Nürnberg, Lange Gasse 20, 90403 Nürnberg, Germany; e-mail: christian.merkl@fau.de.
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Abstract

This paper presents a theory of the labor market matching process in terms of incentive-based, two-sided search among heterogeneous agents. The matching process is decomposed into its two component stages: the contact stage, in which job searchers make contact with employers, and the selection stage, in which they decide whether to match. We construct a theoretical model explaining two-sided selection through microeconomic incentives. Firms face adjustment costs in responding to heterogeneous variations in the characteristics of workers and jobs. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. Our calibrated model for the United States can account for important empirical regularities, such as the large volatilities of labor market variables, that the conventional matching model cannot.

Keywords

MatchingIncentivesAdjustment CostsUnemploymentEmploymentQuitsFiringJob OffersJob Acceptance
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 3 , April 2015 , pp. 643 - 668
Copyright
Copyright © Cambridge University Press 2013 

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