Search, Risk Aversion, and Assortative Matching

Xiaoming Cai is an Associate Professor of Economics at Peking University HSBC Business School. He received his Bachelor's degree from Peking University in 2008 and his PhD from Vrije Universiteit Amsterdam in 2015. His research focuses on macroeconomics and labor economics, and he has published multiple papers in leading economics journals, including Journal of Economic Theory, International Economic Review, and American Economic Journal: Macroeconomics.

This paper studies assortative matching between heterogeneous workers and firms in a directed search model with production complementarity and risk averse workers. I show that positive assortative matching (PAM) occurs if and only if the   the elasticity of complementarity of the production function times that of the matching function exceeds the coefficient of the relative risk aversion of the logarithm of the utility function. This condition is particularly simple if we require PAM to hold for regular search technologies: The utility gain of consuming the match output is log-supermodular.