By integrating frictional sorting into the neoclassical framework with post-match investment by firms, this paper analyzes the social optimum and the equilibrium. A main theoretical result is that post-match investment restores positive assortative matching (PAM) to the social optimum in the...

When there are search frictions in the labor market, physical capital accumulation by firms interacts with job dynamics. To study this interaction, this paper integrates directed, on-the-job search (OJS) into the neoclassical theory of firm investments, analytically characterizes the social...