A Non-cooperative Approach to Hedonic Equilibrium

This paper studies Bayesian equilibrium in a worker firm matching problem in which workers choose their human capital investment and firms choose wages before the matching process occurs. Symmetric equilibrium exists, and supports assortative matching. When the number of traders is large, the highest types invest efficiently, while low types invest too much and receive wages that are too high in the sense that both the worker and firm could have been better off if they had agreed ex ante on a lower wage and investment. The environment is then an unusual one in the sense that large numbers of traders is not enough to support outcomes close to the competitive equilibrium.