An assignment model with match specific productivity

Abstract

In this article I develop a dynamic assignment model where matches are subjected to persistent idiosyncratic shocks. The model nests two independent models commonly used in the matching literature that have highlighted different aspects of the data. On one hand, there is ex ante heterogeneity as in traditional assignment models, so the equilibrium distribution of the match surplus between partners depends on the distributions of both types of agent characteristics in the economy (Roy (1951), Tinbergen (1951) and Koopmans and Beckmann (1957)). On the other hand, the model incorporates the fact that match outcomes are subjected to match–specific shocks, which may eventually lead to match termination (Jovanovic (1979)). I use the model to study the CEO - firm matching problem, an issue that has taken a lot of attention in recent work. (See for instance, Gabaix and Landier (2008) and Tervio (2008))