Description

In this article I study a dynamic stochastic extension of the “d ifferential rents” model of Sattinger (1979) that generates endogenous mism atch in equilibrium. I depart from the standard assignment literature in assuming that agents’ characteristics may change over time and that re-matching is feasible but costl y. I show that, when agent characteristics are stochastic, rigidities that pr event partners from re-matching may change the matching outcome, even if the level of output continue s to satisfy monotone differences in type. I construct and prove the existence of an equilibrium characterized by (i) a positive assortative matching between agen ts that decide to re-match and (ii) bands of inaction for existing matches.