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 lime con suming. This is cast in a labor market setting where workers of different s kills match with different machine qualities. I characterize the efficient allocation and then show that it call be decentralized by a market mechanis m. The efficient assignment is not always positively assortative. despite t he 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. (C) 2001 Academic Pr ess.