Labor Market Matching with Ensuing Competitive Externalities in Large Economies

This paper examines the efficiency of stable matchings in a framework of general equilibrium. In my model of a large private competitive economy, firms and managers form partnerships in an upstream labor (matching) market and then firm-manager pairs compete in a downstream goods market. I find that stable matchings exist and are generally efficient in terms of social welfare. Even though competitive externalities from the downstream goods market affect the preferences of agents in the labor market. The effects on social welfare are completely internalized by the market system. However, stable matchings are not producer-optimal, in general, even in the cases when the feedback from the goods market does not affect agents' preferences