Match Quality and Contractual Sorting

We ask whether match-specific quality has an effect on the type of contractual arrangements that firms offer to workers. We present evidence that contractual arrangements depend on match quality and that heterogeneity in pay mechanisms has a significant effect on employment durations and wage dynamics.

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Abstract. This paper examines the impact of match-specific heterogeneity on compensation arrangements. In a stylized contractual choice problem, we show that employers may have an incentive to offer performance-based contracts when match-specific productivity is high. We test the empirical content of this hypothesis using the NLSY79, which contains information about individual job histories and performance pay. We find that better match quality does affect pay arrangements, employment durations, and wage cyclicality. Direct evidence on the accrual of job offers to workers lends support to the hypothesis that employers use performance-related compensation to preserve high-quality matches.


  title={Match Quality and Contractual Sorting},
  author={Galindo da Fonseca, Joao and Gallipoli, Giovanni and Yedid-Levi, Yaniv},
  journal={Labour Economics}