The market for reputation: Repeated Matching and Career Concerns

I propose a multiperiod matching model of firms and managers to explain that labor market sorting with imperfect measures may not guarantee economic efficiency in matching. In the model, firms compete for managerial talent and managers are concerned about their reputation. Due to the trade-off between match efficiency from productive complementarity and agency costs from managers’ reputational concerns, assortative matching of firms and managers may fail. I derive sufficient conditions for such failure with respect to the size distributions of firms. The model can be applied to various agency problems with consideration of the labor market for managers, which will be particularly useful for analyzing cross-sectional patterns of two-sided matching, and aggregate firm performance and agency costs.