Two cornerstones of empirical and policy analysis of firms in industrial organization, macro and labor are the determinants of the firm size distribution, and the determinants of sorting between workers and firms. We propose a unifying theory of production where management resolves a tradeoff between hiring more versus better workers. The span of control or size is therefore intimately intertwined with the sorting pattern. We provide a condition for sorting that captures this tradeoff between the quantity and quality of workers and that generalizes Becker’s sorting condition. A system of differential equations determines the equilibrium allocation, the firm size and wages, and allows us to characterize the allocation of the quality and quantity of labor to firms of different productivity. We show that our model nests a large number of widely used existing models. We also augment the model to incorporate labor market frictions in the presence of sorting with large firms.
Assortative Matching with Large Firms
Econometrica. 2018 86(1): 85-132. With Jan Eeckhout.
When heterogeneous firms can choose both how many and which workers to hire, we illustrate consequences for firm-size and wage inequality.
Note a correction for the condition with capital: corrigendum.
Econometrica, 2015, Vol 83 (5), 1849-1875. With K. Kim. [online appendix] We introduce cheap-talk into a market game and study if the equilibrium can replicate the constraint efficient allocation under (reserve) price posting. Go to paper
B.E. Journals of Theoretical Economics, 2013, Vol 13 (1). With S. Ludwig and A. Sandroni. We document a revealed preference for randomization for “social goods”, while such non-standard behavior is not present for private consumption goods. Go to paper
International Economic Review, 2012, Vol 53 (1), 1-21. With M. Galenianos. We study a finite directed-search wage posting game among heterogeneous firms (allowing for risk aversion, moral hazard,…), including limit theorems. Go to paper
International Economic Review, 2011, 52(1), pp 85-104. With M. Galenianos and G. Virag. [technical appendix] In directed search with a finite population, minimum wages improve employment but reduce output and efficiency, and reverse for unemployment benefits. Go to paper
Econometrica, 2019 87(4): 1081-1113. With J. Greenwood, C. Santos and M. Tertilt A calibrated equilibrium search model of an HIV/AIDS epidemic is developed to analyze the direct impact and the behavioral adjustment to policies. Go to paper
Journal of Monetary Economics, 2008, Vol. 55, pp. 1054-1066. With M. Galenianos. We characterize price dispersion and welfare in a monetary model with private information: inflation is regressive even though the rich hold more money. Go to paper