Labor market matching with ensuing competitive externalities in large economies

Abstract

I formulate a model of a large private economy in which firms and managers form partnerships in an upstream labor (matching) market and then firm–manager pairs compete in a downstream goods market. I establish the existence and the general efficiency, in terms of social welfare, of stable matchings. However, stable matchings are not producer-optimal, in general, even in the cases when the feedback from the goods market does not affect agents’ preferences.