Downstream Competition and Upstream Labor Market Matching

This paper investigates how externalities from downstream competition shape sorting in upstream labor markets. We model it as a two-stage game: A first stage of simultaneous 1-to-1 matching between firms and managers and a second stage of Cournot competition among matched pairs. If firm technology and human capital are strategic complements, it is rational for each firm-manager pair to expect that the remaining agents will form a positive assortative matching (PAM), and the PAM on the grand market is a stable matching under rational expectations. Even if they are strategic substitutes yet the substitutive effect is relatively moderate, the PAM is still stable. However, if the substitutive effect is sufficiently strong, a negative assortative matching is stable. Social welfare induced by stable matchings is discussed.Earlier versions were circulated as "Matching Prior to Cournot Competition: An Assignment Game with Externalities" and "Assignment Games with Externalities And Matching-Based Cournot Competition"