EFFICIENCY OF INVESTMENT IN HUMAN AND PHYSICAL CAPITAL IN A MODEL OF BILATERAL SEARCH AND BARGAINING

A matching model is used to analyze the effect of search frictions on incentives to invest in human and physical capital. Equilibrium involv es inefficient (low) levels of investment. The source of the inefficie ncy cannot be attributed solely to either search or bargaining. Scheme s that assist matching are Pareto-improving. While the ratio of worker s to firms remains fixed, intermediaries that pay owners according to the amount of capital carried into the market are able to generate eff icient outcomes. Such intervention may not eliminate inefficiencies wh en the ratio is endogenized. Policy implications include encouragement of investment (even while abstracting from growth).