A theoretical analysis is proposed of segregation as an equilibrium phenomenon in a random-matching model of the marriage market. Otherwise identical partners possess a pay-off-irrelevant characteristic, colour. We derive the set of colour-blind equilibria and show that they are generically constrained inefficient. Equilibrium segregation strategies are strategies that condition actions on the type of match. It is shown that distributions of types exist such that segregation equilibrium pay-offs Pareto dominate colour-blind pay-offs. For other distributions, segregation also generates conflict, where the majority unambiguously gains, while the minority group may lose. Giving preferential treatment, that is, minority bias, can increase overall welfare.

This reply refutes the objection raised by Levy (2009) about the fit of the upper tail of the city size distribution in Eeckhout (2004). I show that the method on which his conclusion is based is unsubstantiated. The visual interpretation of the fit on log-log plots is misleading. In addition, the methodology used to estimate a truncated subsample of the distribution while testing its significance against a distribution with prespecified parameters is ill-founded. The main conclusion is that Gibrat's law holds: city sizes follow proportionate growth, thus giving rise to a lognormal size distribution, tail included.

Two empirical regularities concerning the size distribution of cities have repeatedly been established: Zipf's law holds (the upper tail is Pareto), and city growth is proportionate. Census 2000 data are used covering the entire size distribution, not just the upper tail. The nontruncated distribution is shown to be lognormal, rather than Pareto. This provides a simple justification for the coexistence of proportionate growth and the resulting lognormal distribution. An equilibrium theory of local externalities that can explain the empirical size distribution of cities is proposed. The driving force is a random productivity process of local economies and the perfect mobility of workers.

We propose a theory that analyzes how a workers’ asset holdings affect their job productivity. In a labor market with uninsurable risk, workers choose to direct their job search trading off productivity and wages against unemployment risk. Workers with low asset holdings have a precautionary job search motive, they direct their search to low productivity jobs because those offer a low risk at the cost of low productivity and a low wage. Our main theoretical contribution shows that the presence of consumption smoothing can reconcile the directed search model with negative duration-dependence on wages, a robust empirical regularity that the canonical directed search model cannot rationalize. We calibrate the infinite horizon economy and find this mechanism to be quantitatively important. We evaluate a tax financed unemployment insurance (UI) scheme and analyze how it affects welfare. Aggregate welfare is inverted U-shaped in benefits: the insurance effect UI dominates the incentive effects for low levels of benefits and vice versa for high benefits. In addition, when UI increases, total production falls in the economy while worker productivity increases.

In many economic applications of matching, the teams that form compete later in market structures with strategic interactions or with knowledge spillovers. Such post-match competition introduces externalities at the matching stage: a team’s payoff depends not only on their members’ attributes but also on those of other matched teams. This article develops a large market model of matching with externalities, in which first teams form, and then they compete. We analyse the sorting patterns that ensue under competitive equilibrium as well as their efficiency properties. Our main results show that insights substantially differ from those of the standard model without externalities: there can be multiple competitive equilibria with different sorting patterns; both optimal and competitive equilibrium matching can involve randomization; and competitive equilibrium can be inefficient with a matching that can drastically deviate from the optimal one. We also shed light on the economic relevance of our matching model with externalities. We analyse two economic applications that illustrate how our model can rationalize the trend in within- and between-firm inequality, and also the evolution of markups of sectors where firms have market power.

Two cornerstones of empirical and policy analysis of firms, in macro, labor and industrial organization, are the determinants of the firm size distribution and the determinants of sorting between workers and firms. We propose a unifying theory of production where management resolves a tradeoff between hiring more versus better workers. The span of control or size is therefore intimately intertwined with the sorting pattern. We provide a condition for sorting that captures this tradeoff between the quantity and quality of workers and that generalizes Becker's sorting condition. A system of differential equations determines the equilibrium allocation, the firm size, and wages, and allows us to characterize the allocation of the quality and quantity of labor to firms of different productivity. We show that our model nests a large number of widely used existing models. We also augment the model to incorporate labor market frictions in the presence of sorting with large firms.

We investigate the role of search frictions in markets with price competition and how it leads to sorting of heterogeneous agents. There are two aspects of value creation: the match value when two agents actually trade and the probability of trading governed by the search technology. We show that positive assortative matching obtains when complementarities in the former outweigh complementarities in the latter. This happens if and only if the match-value function is root-supermodular, that is, its nth root is supermodular, where n reflects the elasticity of substitution of the search technology. This condition is weaker than the condition required for positive assortative matching in markets with random search.

Toward understanding assortative matching, this is a self-contained introduction to research on search and matching. We first explore the nontransferable and perfectly transferable utility matching paradigms, and then a unifying imperfectly transferable utility matching model. Motivated by some unrealistic predictions of frictionless matching, we flesh out the foundational economics of search theory. We then revisit the original matching paradigms with search frictions. We finally allow informational frictions that often arise, such as in college-student sorting.

We develop a dynamic model with knowledge spillovers in production. The model contains two opposing forces. Imitation of other firms helps followers catch up with leaders, but the prospect of doing so makes followers want to free ride. The second force dominates and creates permanent inequality. We show that the greater are the average spillovers and the easier they are to obtain, the greater is the free-riding and inequality. More directed copying raises inequality by raising the free-riding advantages of hanging back. Using Compustat and patent-citation data we find that copying is highly undirected.