Identifying sorting: in theory

Jan Eeckhout and Philipp Kircher

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Assortative Matching between workers and firms provides evidence of the complementarities or substitutes in production. The presence of complementarities is important for policies that aim to achieve the optimal allocation of resources, for example unemployment insurance. We argue that using wage data alone, it is virtually impossible to identify whether Assortative Matching is positive or negative. Even though we cannot identify the sign of the sorting, we can identify the strength, i.e., the magnitude of the cross-partial, and the associated welfare loss. We show first that the wage for a given worker is non-monotonic in the type of his employer. This is due to the fact that in a sorting model, wages re ect the opportunity cost of mismatch. We show analytically that this non-monotonicity prevents standard form fixed effects to correlate with the true type of the form. We then propose an alternative procedure that measures the strength of sorting in the presence of search frictions. Knowing the strength of sorting facilitates the measurement of the output loss due to mismatch.

Keywords: sorting; assortative matching; complementarities; supermodularity; identification (search for similar items in EconPapers)
JEL-codes: C78 J0 J31 J60 (search for similar items in EconPapers)
Date: 2011-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (159)

Published in Review of Economic Studies, July, 2011, 78(3), pp. 872-906. ISSN: 0034-6527

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http://eprints.lse.ac.uk/29708/ Open access version. (application/pdf)

Related works:
Journal Article: Identifying Sorting--In Theory (2011)
Working Paper: Identifying Sorting: In Theory (2009)
Working Paper: Identifying Sorting - In Theory (2009)
Working Paper: Identifying Sorting, In Theory (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:29708

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