Labor Market Matching with Ensuing Competitive Externalities in Large Economies

This paper presents a general model of an economy of two connected markets: a labor market, in which a continuum of managers are to be assigned to a continuum of firms, and a goods market, in which firms play perfect output competition. A Walrasian equilibrium always exists in the model. If firm technology and human capital are complementary, in equilibrium the positive assortative matching (PAM) is stable; if substutative, the nagative assortative matching (NAM) is stable. As the unit production cost of each firm-manager pair goes to be constant, the PAM will be the unique stable matching except on a null-set.