Double-Holdups in a Matching Model with Search Frictions and Endogenous Heterogeneity

This paper investigates the interaction between education decisions by workers and investment decisions by firms in a random matching model with endogenous heterogeneity. I analyze the efficiency properties of the equilibrium and find that in the presence of search frictions and investment costs in both human and physical capital, while workers under-invest in education firms may efficiently invest in high-skill jobs. I find that due to a technological externality, under-investments by workers alleviate the holdup problem faced by firms. Moreover, I show that there is a combination of human and physical capital costs that solves the firms' holdup problem