“Spatial Sorting” by Jan Eeckhout
University College London
We analyze matching markets with stochastic types: agents’ payoff-relevant characteristics are realized after matching takes place, and matches are formed based on ex-ante attributes. We derive conditions for positive/negative assortative matching which relate properties of the match payoff function with the stochastic order imposed on the distributions of the agents’ characteristics. We apply this framework to the labor market for executives and analyze the matching of CEO’s to firms in a principal-agent setting. Using data on US executive compensation, we find that CEO’s are substantially mismatched: while there are complementarities in output, ex ante types are barely predicting ex post types. In theory, mismatch leads to an output loss both due to suboptimal effort and the misallocation of types. Quantitatively however, the effect of suboptimal effort is small. This indicates that screening and corporate governance to ensure that the right (wo)man for the job is selected are more important than the provision of incentives.