Abstract
We model stable, non-assortative labor-market matchings. We endogenize how transferable utility is: a matched firm and worker play an infinite-horizon game with one-sided moral hazard. Becker's (1973) result that complementarity yields positively assortative matching fails, because increasing match quality harms dynamic incentives: a firm cannot credibly threaten to fire a worker who is productive even with low effort. Thus, firms may prefer lower-type workers who will exert more effort. We offer a new interpretation of efficiency wages: committing to a high wage improves effort incentives indirectly by increasing the firm's willingness to walk away. We also show that the set of stable outcomes has a lattice structure.
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