A Stochastic Assignment Model

Alberto Naudon ()

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: In this article I study a dynamic stochastic extension of the “differential rents” model of Sattinger (1979) that generates endogenous mismatch in equilibrium. I depart from the standard assignment literature in assuming that agents’ characteristics may change over time and that re-matching is feasible but costly. I show that, when agent characteristics are stochastic, rigidities that prevent partners from re-matching may change the matching outcome, even if the level of output continues to satisfy monotone differences in type. I construct and prove the existence of an equilibrium characterized by (i) a positive assortative matching between agents that decide to re-match and (ii) bands of inaction for existing matches.

Date: 2010-03
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