American Economic Review: Vol. 104 No. 5 (May 2014)

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Investment Incentives in Labor Market Matching

Article Citation

Hatfield, John William, Fuhito Kojima, and Scott Duke Kominers. 2014. "Investment Incentives in Labor Market Matching." American Economic Review, 104(5): 436-41.

DOI: 10.1257/aer.104.5.436

Abstract

We provide an illustration of how the design of labor market clearing mechanisms can affect incentives for human capital acquisition. Specifically, we extend the labor market matching model (with discrete transfers) of Kelso and Crawford (1982) to incorporate the possibility that agents may invest in human capital before matching. We show that in this setting, the worker-optimal stable matching mechanism incentivizes workers to make (nearly) efficient human capital investments. En route to our main result, we show that so long as the space of salaries is sufficiently rich, every stable outcome in the Kelso and Crawford (1982) setting is approximately efficient.

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Authors

Hatfield, John William (U TX)
Kojima, Fuhito (Stanford U)
Kominers, Scott Duke (Harvard U)

JEL Classifications

C78: Bargaining Theory; Matching Theory
D82: Asymmetric and Private Information; Mechanism Design
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
J41: Labor Contracts


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