Abstract
We employ the assignment game of Shapley and Shubik (Int J Game Theory 1:111–130, 1972) to study the endogenous matching patterns in a market that consists of heterogenous principals and agents. We show that, in general, the equilibrium matching is non-assortative. We then characterize the equilibrium relationship between risk and performance pay and risk and fixed compensation. This is the first paper that characterizes the equilibrium matching, to its fullest possible extent, building on the Holmstrom and Milgrom (Econometrica 55:303–328, 1987) principal-agent model. This model has been used extensively in the empirical literature and therefore we hope that our results will be of value to empirical researchers who wish to study a principal-agent market.
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I would like to thank Jingpeng Ma and Vibhas Madan for helpful comments and suggestions. I have also benefited from seminar participants at Drexel University, University of Copenhagen, Kennesaw State University, University of Illinois at Champaign-Urbana, University of Southern Illinois-Carbondale, SUNY-Stony Brook, CUNY-Graduate Center, the Western Economic Association meetings in San Francisco 2001 and the Summer 2002 meetings of the Econometric Society at UCLA. I am responsible for all the remaining errors.
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Serfes, K. Endogenous matching in a market with heterogeneous principals and agents. Int J Game Theory 36, 587–619 (2008). https://doi.org/10.1007/s00182-007-0109-y
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DOI: https://doi.org/10.1007/s00182-007-0109-y