Working Paper

An Incentive Theory of Matching

Kiel Working Papers, 1512

This paper presents a theory of the labor market matching process in terms of

incentive-based, two-sided search among heterogeneous agents. The matching process

is decomposed into its two component stages: the contact stage, in which job searchers

make contact with employers and the selection stage, in which they decide whether

to match. We construct a theoretical model explaining two-sided selection through

microeconomic incentives. Firms face adjustment costs in responding to heterogeneous

variations in the characteristics of workers and jobs. Matches and separations are

described through …rms’job o¤er and …ring decisions and workers’job acceptance and

quit decisions. Our calibrated model for the U.S. can account for important empirical

regularities, such as the large volatilities of labor market variables, that the conventional

matching model cannot.


Alessio J. G. Brown
Christian Merkl