MACRO: Search, Risk Aversion, and Assortative Matching; Professor Xiaoming Cai (Peking University HSBC Business School)

Abstract:

This paper studies assortative matching between heterogeneous workers and firms in a directed search model with production complementarity and risk averse workers. I show that positive assortative matching (PAM) occurs if and only if the elasticity of complementarity of the production function times that of the matching function exceeds the coefficient of the relative risk aversion of the logarithm of the utility function. This condition is particularly simple if we require PAM to hold for all matching functions: The utility gain from consuming the match output is log-supermodular. Finally, I analyze how unemployment insurance affects sorting by reducing workers' risk aversion.

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