EFFICIENCY IN A MATCHING MODEL WITH HETEROGENEOUS AGENTS: TOO MANY GOOD OR BAD JOBS?

This paper analyzes the efficiency of the equilibrium allocation in a matching model with two types of workers and jobs. The technology is such that high-skill workers can perform all jobs, while low-skill workers can only perform unskilled jobs. In this setup two types equilibria may occur. A “cross-skill matching equilibrium” in which high-skill workers accept all jobs and an “ex-post segmentation equilibrium” in which they accept only skilled jobs. Our first result shows that the equilibrium with ex-post bargaining is never efficient. Second, under Hosios´ (1990) condition we show that low-skill workers are overvalued, while the opposite holds for high-skill workers. In equilibrium, firms therefore create too few unskilled jobs and too many skilled jobs. In addition, high-skill workers may decide to accept unskilled jobs while the efficient allocation features ex-post segmentation. Finally, in an extension we show that efficiency can be restored through taxation and we analyze how workers´ bargaining strength affects unemployment and the degree of skill-mismatch.