TY - JOUR
T1 - Risky Matching
AU - Chade, Hector
AU - Lindenlaub, Ilse
N1 - Publisher Copyright:
© 2021 The Author(s) 2021. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.
PY - 2022/3/1
Y1 - 2022/3/1
N2 - We develop a model where risk-averse workers can costly invest in their skills before matching with heterogenous firms. At the investment stage, workers face multiple sources of risk. They are uncertain about how skilled they will turn out and also about their income shock realizations at the time of employment. We analyse the equilibria of two versions of the model that depend on when uncertainty resolves, which determines the available risk-sharing possibilities between workers and firms. We provide a thorough analysis of equilibrium comparative statics regarding changes in risk, worker and firm heterogeneity, and technology. We derive conditions on the match output function and risk attitudes under which these shifts lead to more investment and show how this affects matching and wages. To illustrate the applied relevance of our theory, we provide a stylized quantitative assessment of the model and analyse the sources (risk, heterogeneity, or technology) of rising U.S. wage inequality. We find that changes in risk were the most important driver behind the surge in inequality, followed by technological change. We show that these conclusions are significantly altered if one neglects the key feature of our model, which is that educational investment is endogenous.
AB - We develop a model where risk-averse workers can costly invest in their skills before matching with heterogenous firms. At the investment stage, workers face multiple sources of risk. They are uncertain about how skilled they will turn out and also about their income shock realizations at the time of employment. We analyse the equilibria of two versions of the model that depend on when uncertainty resolves, which determines the available risk-sharing possibilities between workers and firms. We provide a thorough analysis of equilibrium comparative statics regarding changes in risk, worker and firm heterogeneity, and technology. We derive conditions on the match output function and risk attitudes under which these shifts lead to more investment and show how this affects matching and wages. To illustrate the applied relevance of our theory, we provide a stylized quantitative assessment of the model and analyse the sources (risk, heterogeneity, or technology) of rising U.S. wage inequality. We find that changes in risk were the most important driver behind the surge in inequality, followed by technological change. We show that these conclusions are significantly altered if one neglects the key feature of our model, which is that educational investment is endogenous.
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U2 - 10.1093/restud/rdab033
DO - 10.1093/restud/rdab033
M3 - Article
AN - SCOPUS:85126807886
SN - 0034-6527
VL - 89
SP - 626
EP - 665
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 2
ER -