Mis-match, Re-match, and Investment

Mobility depends essentially on investment, which often occurs in environments in which individuals match (school) or will match after investing (the labor market). Where partners can transfer surplus to each other only imperfectly (NTU), the pattern of matching will typically be inefficient, involving too much segregation, and providing a possible rationale for ”associational redistribution” such as affirmative action: a social planner who could enforce a matching outcome that differs from the market outcome may raise aggregate social surplus. We show that this static inefficiency due to NTU can be exacerbated in a dynamic environment in which individuals’ productive types are determined by investments made before they match. In contrast to TU models there will typically be investment distortions, with high types over-investing and low types under-investing. We study several forms of associational redistribution, assessing the differential effects of achievement-based and background-based polices; early-stage and later-stage policies; and interactions between them.