Negative Assortative Matching Research Articles

No Line Left Behind: Assortative Matching Inside the Firm

Abstract We leverage the high degree of worker mobility across production lines in a large Indian manufacturer to estimate the sorting of workers to managers, using data on daily worker productivity. We find negative assortative matching (NAM): better workers tend to be matched with worse managers. Estimates of the production technology, however, reveal that productivity would increase by up to 4% under positive sorting. Exploiting a survey of managers and data on orders from multinational brands, we document that NAM arises, at least partly, because maintaining valuable relationships with buyers provides strong incentives to avoid delays on any given production line.

Corruption and assortative matching of partners in international trade

Although the effects of corruption on bilateral trade are well-documented, its impact on the composition of trading partners remains unexplored. In this paper, we argue that corruption in a country imposes asymmetric costs on its trading partners depending on their characteristics. Consequently, as the level of corruption in a country changes, its trade flows from some of its trading partners change more than others, depending on their characteristics, changing the composition of its trading partners. We focus on two characteristics of trading partners: (1) the level of corruption and (2) membership in the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention). Using the gravity model, we find evidence of a negative assortative matching in international trade with respect to corruption. We find that corruption in a country is negatively associated with trade flows from high-corrupt countries and is positively associated with trade volume from signatories of the OECD convention. Our results suggest that future studies on this topic should consider controlling for institutional dissimilarities between the trading partners as it has implications for bilateral trade costs.

Matching for Strategic Organizations: Theory and Empirics from Internal Labor Markets

Organizations have recently embraced the tools of market design to address job assignment and internal mobility problems. However, matching objectives within an organization are distinct from those in other settings. We model firm-optimal job assignments and the tradeoffs of using different matching institutions. Our results illuminate where preference-respecting mechanisms (such as those developed for stable matching) perform well for organizational purposes. We then turn to a large organization's internal labor market for empirics. We find that optimal matching is highly productive. Using the organization's preferred metric, the optimal match is 36% more productive than randomly assigned matches within job categories. However, it achieves this through negative assortative matching, placing a majority of workers and managers with assignments they did not rank. By contrast, preference-based matches (using deferred acceptance) are much less productive. They are only 3% more valuable to the firm than the average random match, 24% less than the firm's optimal, and feature positive assortative matching. However, workers and managers are significantly more likely to be assigned to a preferred partner; only 25% are assigned to a match they did not rank.

Bureaucrat Allocation in the Public Sector: Evidence from the World Bank

Abstract The allocation of bureaucrats across tasks constitutes a pivotal instrument for achieving an organisation’s objectives. In this paper, I measure the performance of World Bank bureaucrats by combining the universe of task assignment with an evaluation of task outcome and bureaucrat CVs. I introduce two stylised facts. First, bureaucrat performance correlates with task features and individual characteristics. Second, there exists a negative assortative matching between high-performing bureaucrats and low-performing countries. In response to natural disasters, which may further weaken countries’ performance, I observe that low-performing countries receive an additional allocation of high-performing bureaucrats. I discuss various interpretations of these findings.

Are Inventors or Firms the Engines of Innovation?

In this study, we empirically assess the contributions of inventors and firms for innovation using a 37-year panel of U.S. patenting activity. We estimate that inventors’ human capital is 5–10 times more important than firm capabilities for explaining the variance in inventor output. We then examine matching between inventors and firms and find highly talented inventors are attracted to firms that (i) have weak firm-specific invention capabilities and (ii) employ other talented inventors. A theoretical model that incorporates worker preferences for inventive output rationalizes our empirical findings of negative assortative matching between inventors and firms and positive assortative matching among inventors. This paper was accepted by Ashish Arora, entrepreneurship and innovation.

The Optimal Assortativity of Teams Inside the Firm

How does a profit-maximizing manager form teams and compensate workers in the presence of both adverse selection and moral hazard? Under complete information, it is well known that any complementarity in characteristics implies that positive assortative matching is productively efficient. But, under asymmetric information, we uncover the problem of disassortative incentives: incentive costs may increase in assortativity. Profit maximization thus prescribes either random or negative assortative matching, both productively inefficient, when complementarities are weak and effort costs are high enough. When this is the case, the manager may instead prefer to delegate matching, allowing workers to sort themselves into teams. Our results shed light on recent empirical work documenting patterns of non-assortative matching inside of firms.

The Optimal Assortativity of Teams Inside the Firm

How does a profit-maximizing manager form teams and compensate workers in the presence of both adverse selection and moral hazard? Under complete information, it is well known that any complementarity in characteristics implies that positive assortative matching is productively efficent. But, under asymmetric information, we uncover the problem of disassortative incentives: incentive costs may increase in assortativity. Profit maximization thus prescribes either random or negative assortative matching, both productively inefficient, when complementarities are weak and eort costs are high enough. When this is the case, the manager may instead prefer to delegate matching, allowing workers to sort themselves into teams. Our results shed light on recent empirical work documenting patterns of non-assortative matching inside of firms.

The Allocation of Socially Responsible Capital

Portfolio allocation decisions increasingly incorporate social values. The most common of these strategies are misguided. We develop a tractable framework in which commercial and social investors compete, and identify alternative strategies for social investors that result in higher social welfare and higher financial returns. From the enterprise perspective, increasing profitability can have a greater social impact than directly increasing social value creation. Whether investors and firms exhibit positive or negative assortative matching depends on the nature of social preferences. We present empirical evidence that socially-guided mutual funds allocate their capital inefficiently from the perspective of generating impact and financial returns.

Downstream competition and upstream labor market matching

This study investigates how externalities from downstream competition shape sorting in upstream labor markets. I model this as a two-stage game: A first stage of simultaneous one-to-one matching between firms and managers and a second stage of Cournot competition among matched pairs. If a firm’s technology and human capital are strategic complements, it is rational for each firm-manager pair to expect that the remaining agents will form a positive assortative matching (PAM), and the PAM on the grand market is a stable matching under rational expectations. The PAM remains stable even when they are strategic substitutes but the substitutive effect is moderate. However, if the substitutive effect is sufficiently strong, a negative assortative matching is stable. Social welfare induced by stable matchings is discussed.

Variation in Output Shares and Endogenous Matching in Land Rental Contracts: Evidence from Ethiopia

AbstractWe investigate the extent of variation in output sharing in land rental contracts and alternative hypotheses to explain this variation. Close to half of the rental contracts in our study in northern Ethiopia have output shares that deviate from the dominant 50–50 equal sharing. Variation in land quality, the relative bargaining power of landlords and tenants, production risks and shocks are hypothesised to influence output shares. Matched data of landlords and tenants are used. The importance of endogenous matching of landlords and tenants is investigated by assessing how endogenous tenant characteristics are correlated with landlord characteristics. We find evidence of negative assortative matching for key resource characteristics. A control function approach is used to control for endogenous matching in the output share models. The results reveal that production risks, as well as relative bargaining power, affect output shares in the reverse tenancy setting where tenants are relatively wealthier and more influential than landlords.

No Line Left Behind: Assortative Matching Inside the Firm

How do firms pair workers with managers, and which constraints affect the allocation of labor within the firm? We characterize the sorting pattern of managers to workers in a large readymade garment manufacturer in India, and then explore potential drivers of the observed allocation. Workers in this firm are organized into production lines, each supervised by a manager. We exploit the high degree of worker mobility across lines, together with worker-level productivity data, to estimate the sorting of workers to managers. We find negative assortative matching (NAM) -that is, better managers tend to match with worse workers, and vice versa. This stands in contrast to our estimates of the production technology, which reveal that if the firm were to positively sort, productivity would increase by 1 to 4 percent across the six factories in our data. Coupling these findings with a survey of managers and with data on multinational brands and the orders they place, we document that NAM arises, at least in part, because the value of buyer relationships imposes minimum productivity constraints on each production line. Our results emphasize that suppliers to the global market, when they are beholden to a small set of powerful buyers, may be driven to allocate managerial skill to service these relationships, even at the expense of productivity.

A Two‐sided Matching Model of Monitored Finance

We analyse an incentive contracting model of partnership formation between heterogeneous investors and entrepreneurs. Partnerships are subject to double‐sided moral hazard problems in entrepreneurial action and monitoring by investors. Greater monitoring ability implies stronger incentives to monitor. On the other hand, low‐collateral borrowers have lower inside equity participation. Hence the incentive problem is best mitigated by assigning low‐collateralized entrepreneurs to high‐ability investors following a negative assortative matching pattern. Moreover, negative assortative matching implies that the equilibrium loan rate is in general non‐monotonic in borrower collateral. Finally, our model sheds light on how changes in the inequality of collateral distribution affect the cost of external borrowing.

Is it better to be mixed in group lending?

AbstractThis paper shows that, in a group‐lending scheme with joint liability, a microfinance institution can achieve a Pareto improvement by promoting negative assortative matching among borrowers. The main results are: (i) borrowers may be better off in heterogeneous groups; and (ii) a heterogeneous group equilibrium is possible when individual or homogeneous group equilibria do not exist.

Post-Match Investment and Dynamic Sorting between Capital and Labor

By integrating frictional sorting into the neoclassical framework with post-match investment by firms, this paper analyzes the social optimum and the equilibrium. A main theoretical result is that post-match investment restores positive assortative matching (PAM) to the social optimum in the long run, but increases the likelihood of negative assortative matching (NAM) at the beginning of a match. The stronger is the complementarity between capital and the skill in production, the more likely is NAM to occur at the beginning of a match. I calibrate the model to show that sorting is NAM initially but becomes PAM on average over time. Workers with a higher skill have higher labor productivity and wages throughout the match. They also have steeper time profiles of these variables. There is sizable within-skill inequality in labor productivity and wages. Moreover, an increase in the matching efficiency reduces the labor share and increases the skill premium.

Downstream Competition and Upstream Labor Market Matching

This paper investigates how externalities from downstream competition shape sorting in upstream labor markets. We model it as a two-stage game: A first stage of simultaneous 1-to-1 matching between firms and managers and a second stage of Cournot competition among matched pairs. If firm technology and human capital are strategic complements, it is rational for each firm-manager pair to expect that the remaining agents will form a positive assortative matching (PAM), and the PAM on the grand market is a stable matching under rational expectations. Even if they are strategic substitutes yet the substitutive effect is relatively moderate, the PAM is still stable. However, if the substitutive effect is sufficiently strong, a negative assortative matching is stable. Social welfare induced by stable matchings is discussed. Earlier versions were circulated as Matching Prior to Cournot Competition: An Game with and Assignment Games with Externalities And Matching-Based Cournot Competition.

Human Capital, Firm Capabilities, and Innovation

In this study, we empirically assess the contributions of inventors and firms for innovation using a 37-year panel of U.S. patenting activity. We estimate that inventors’ human capital is 5-10 times more important than firm capabilities for explaining the variance in inventor output. We then examine matching between inventors and firms and find highly talented inventors are attracted to firms that (i) have weak firm-specific invention capabilities, and (ii) employ other talented inventors. A theoretical model that incorporates worker preferences for inventive output rationalizes our empirical findings of negative assortative matching between inventors and firms, and positive assortative matching among inventors.

Assortative matching and risk sharing

This paper explores the sorting patterns in a two-sided matching market where agents facing different risks match to share them. When preference belongs to the class of harmonic absolute risk aversion (HARA), the risk premium is perfectly transferable within each partnership; thus a stable match minimizes the social cost of risk. In the systematic risk model, where agents are ranked by their holdings of a common risky asset, the convexity of the joint risk premium in joint risk size leads to negative assortative matching (NAM). In the idiosyncratic risk model, where agents are ranked by their independent riskiness in the sense of second-order stochastic dominance (SSD), NAM arises when preference exhibits decreasing absolute risk aversion (DARA) in the sense of Ross and riskier background risk leads to more risk-averse behavior. However, NAM may fail to arise when riskier background risk leads to more risk-tolerant behavior.

Assignment of provincial officials based on economic performance: Evidence from China

In China, the allocation of provincial officials reflects the tradeoff of the central authority between the economic growth and regional disparity. Before the early 2000s, the pattern of assignment is close to positive assortative matching between the official's ability and the local provincial endowment, which implies that the central authority's purpose is to maximize the aggregate outputs across provinces, and after the early 2000s, the pattern of assignment converges to negative assortative matching, which is well justified by the central authority's objective of minimizing the regional disparity. This paper contributes to the literatures by exploring the cadre management on the horizontal level.

An empirical examination of matching theories: The one child policy, partner choice and matching intensity in urban China

This paper introduces an index that facilitates the testing of differing matching theories based on the degree of overlap between a theoretically generated matching joint density and its empirical counterpart. The index is asymptotically Normal, consequently permitting inference. To demonstrate its use, the paper examines the effect the One Child Policy had on matching patterns in the marriage market in China. To distinguish between confounding policies of the period, a static general equilibrium model is introduced. It predicts that constraining marital output in the child quantity dimension may raise the marginal benefit of positive assortative matching and investment in child quality, thereby increasing the intensity with which they are pursued and concomitantly reducing the marriage rate. Upon verifying that the policy was binding via a Poisson model, using the matching index, significant support for increases in positive assortative matching and reductions in negative assortative matching were found.

Assortative Matching and Risk Sharing

This paper analyzes sorting pattern of risk-sharing partnerships where agents are heterogenous in their income riskiness. When preference belongs to the class of HARA, household production in terms of monetary equivalence is perfectly transferable between spouses. Hence the characterization of stable match which minimizes social risk premium crucially depends on the interaction between risks in the household portfolio. In the multiplicative model where individuals are ranked by their holdings of a common risky stock, the convexity of household risk premium in joint risk size lead to negative assortative matching. In the additive model where individuals are ranked by their idiosyncratic risks in the Rothschild-Stiglitz sense, negative sorting is stable if any Rothschild-Stiglitz deterioration raises local risk aversion a la Ross.