Frictional Assignment. I. Efficiency

This paper examines the two-sided matching problem where the agents on each side of the market are heterogeneous and the matching process is time consuming. This is cast in a labor market setting where workers of different skills match with different machine qualities. I characterize the efficient allocation and then show that it can be decentralized by a market mechanism. The efficient assignment is not always positively assortative, despite the fact that machine qualities and skills are complementary in production. To decentralize the efficient allocation, the market mechanism requires the firms to post wages and commit each machine quality to a particular skill. Implications on wage inequality are briefly examined. Journal of Economic Literature Classification Numbers: J31, E24, J64. 2001 Academic Press