Specialization and efficiency with labor-market matching

This paper constructs a labor-market matching model with heterogeneous workers. Due to matching frictions, there may be a mismatch of talents within a production team, forcing a worker to specialize in a task at which she is not talented. We consider a partnership model where production takes place in teams consisting of two workers. We characterize the steady-state of the matching equilibrium. The constrained efficiency of the matching equilibrium depends on the distribution of talents. The constrained-efficient allocation can always be implemented by a type-specific tax. We also examine an alternative model with Diamond-Mortensen-Pissarides type matching between firms and workers.