Melvyn G. Coles

Marriage and Class

Here we consider a matching model where agents are heterogeneous and utilities nontransferable. We utilize this framework to study how equilibrium sorting takes place in marriage markets. We impose conditions that guarantee the existence of a steady state equihbrium and then characterize it. Several examples are developed to illustrate the richness of equilibria. The model reveals an interesting sorting externality that can support multiple steady state equilibria, even with constant returns to matching.

Marketplaces and Matching

This paper models equilibrium trading patterns when marketplaces exist and goods are differentiated. When first visiting the market, a buyer samples a stock of goods. If fortunate, the buyer matches with and purchases one of these goods and then exits the market. If an initial match does not exist, the buyer can now only match with the flow of new goods for sale. The previous stock has been sampled and rejected. In a steady state, the current stock of unmatched traders on one side of the market is trying to match with the flow of new traders on the other side. It is shown that this market behaviour describes matching patterns between unemployed job seekers and vacancies in UK Job Centres.

LONG-TERM PARTNERSHIP FORMATION: MARRIAGE AND EMPLOYMENT*

Of course, marriage and employment are different. Nevertheless, a worker looking for a job, a ®rm looking for worker, or a single person looking for a marriage partner face similar problems as all are seeking a long-term partner. Indeed, forming long-term partnerships is a common occurrence in life. There are many other examples ± business people search for other business people to form a pro®table relationship, bridge players seek to ®nd a suitable partners, students search for a good university, we would all like to ®nd a good friend, etc. The problem becomes signi®cant if there are substantial differences in the return obtained from forming a partnership with different partners. For example, employers differ in the wages they offer, or in the work environment they provide. In such a situation a worker may reject some job offers. Similarly, as many have learned to their cost, some make better marriage partners than others. The problem is two-sided. While a worker is evaluating a potential employer, the employer is also evaluating the worker. It is this two-sided aspect of the problem that generates a signi®cant interest. A workers willingness to accept employment at a ®rm depends not only on the characteristics of the ®rm but also the other possible options open to the worker. The better an individuals opportunities elsewhere, the more selective he or she will be in evaluating a potential partnership. An academic who believes Harvard may make an offer in the near future, will be more selective in evaluating offers from lesser universities. In this way expectations play a role. If a single man believes that few, if any, women will ®nd him an acceptable marriage partner, then he may accept the ®rst opportunity that presents itself. Partnership formation, typically, does not comply with a classic market situation, where all participants know everything and all trades take place at zero cost. Finding a job, ®nding a husband or wife, or ®nding a business partner is a time consuming activity where opportunities typically arrive over time at uncertain intervals of time. Of course, we can act in ways that in uence the arrival rate of potential partner. Workers go to employment agencies, or read help wanted advertisements in newspapers, singles of a certain age go to discos, or join tennis clubs. The literature on search and matching (SM) (see Mortensen (1982), and Pissarides (1990) for early examples)1 provides an excellent framework for The Economic Journal, 109 ( June), F307±F334. # Royal Economic Society 1999. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

Equilibrium Wage-Tenure Contracts

In this study we consider a labor market matching model where firms post wage-tenure contracts and workers, both employed and unemployed, search for new job opportunities. Given workers are risk averse, we establish there is a unique equilibrium in the environment considered. Although firms in the market make different offers in equilibrium, all post a wage-tenure contract that implies a workers wage increases smoothly with tenure at the firm. As firms make different offers, there is job turnover, as employed workers move jobs as the opportunity arises. This implies the increase in a workers wage can be due to job-to-job movements as well as wage-tenure effects. Further, there is a nondegenerate equilibrium distribution of initial wage offers that is differentiable on its support except for a mass point at the lowest initial wage. We also show that relevant characteristics of the equilibrium can be written as explicit functions of preferences and the other market parameters.

Indeterminacy and directed search

The directed search approach assumes each seller posts a fixed price and, ex post, randomly allocates the good should more than one buyer desire the good. This paper assumes sellers can post prices which are contingent on ex post realized demand; e.g. an advertisement might state the Bertrand price should there be more than one buyer, which corresponds to an auction outcome. Competition in fixed prices and ex post rationing describes equilibrium behavior. There is also real market indeterminacy: a continuum of equilibria exists which are not payoff equivalent. Sellers prefer the equilibrium in auctions.

HUMAN CAPITAL ACCUMULATION AND LABOR MARKET EQUILIBRIUM

The objective of this paper is to analyse an equilibrium search model with on-the-job search and human capital accumulation. In our model wages are disperse because firms pay workers of the same productivity different wages and workers of different productivies earn different wages. New entrants to the labour market increase their wages mainly through on-the-job search. As workers gain more experience and move up the offer distribution, job-to-job transitions become less frequent and human capital accumulation dominates wage growth. This interaction generates a wage distribution that exhibits a density with a unique mode and a long and decreasing right tail as observed in the data.

Optimal unemployment insurance in a matching equilibrium

This article considers optimal unemployment insurance (UI) in an equilibrium matching framework where wages are determined by strategic bargaining. It compares the outcome with the standard Nash bargaining approach, which can be interpreted as union wage bargaining with an insider/outsider distortion. It also shows that a coordinated policy approach, one that chooses job creation subsidies and UI optimally, generates a much greater welfare gain than a policy that simply varies UI payments by duration.

Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium

This paper extends the bargaining and matching literature such as Rubinstein (1985) and Gale (1986 and 1987) by considering a new matching process. We assume that a central information agency exists, such as job centres and newspapers in the labour market, or real estate agents in the housing market, which puts potential traders into direct contact with each other. With agent heterogeneity, equilibrium trade is characterized by existing traders on the other side (since existing traders have already sampled and rejected each other). Two procedures of trade coexist, namely strategic bilateral bargaining and a competitive bidding process, depending on the number of potential matches a new trader obtains. We characterize the unique symmetric Markov Perfect equilibrium to this stochastic trading game.

Calculating the price of worker reliability

We show why variations in the rate of absenteeism might be expected as an equilibrium phenomenon. Managers may be content with a situation in which a large and stable proportion of their contracted workers do not attend work regularly. Further, we establish an equilibrium framework in which firms who require better attendance rates at work pay higher wages. In this way, we can attempt to explain some of the wage variation observed in the labour market, but, more importantly, we can provide a new vehicle for analysing the structure of absence rates across plants, across firms and across industries. The paper also introduces a measure of the cost of absenteeism that is a more useful guide to effective managerial action than the commonly used total cost concept.

Turnover Externalities with Marketplace Trading

This article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly. Since buyers have idiosyncratic match payoffs for each sellers good, some buyers, rather than trade with the current stock of sellers, wait for new sellers to enter the marketplace to obtain a good they like. A turnover externality exists where all traders are better off with higher entry rates of new traders. Furthermore, this turnover externality supports multiple Pareto-rankable equilibria. This provides new insights into similar results obtained in the random-matching literature. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.