Sorting with Teams

TL;DR

This paper fully characterizes an optimal sorting strategy in a complex labor market with heterogeneous firms and workers, revealing two distinct sorting regimes and their implications for wages and earnings dispersion.

Contribution

It introduces a novel model of sorting with heterogeneous firms and workers, identifying two optimal sorting regimes and deriving equilibrium wages and firm values.

Findings

Optimal sorting involves two regimes: mixing and countermonotonicity.

The model explains earnings dispersion within and across firms.

Equilibrium wages and firm values are explicitly characterized.

Abstract

We fully solve a sorting problem with heterogeneous firms and multiple heterogeneous workers whose skills are imperfect substitutes. We show that optimal sorting, which we call mixed and countermonotonic, is comprised of two regions. In the first region, mediocre firms sort with mediocre workers and coworkers such that the output losses are equal across all these teams (mixing). In the second region, a high skill worker sorts with low skill coworkers and a high productivity firm (countermonotonicity). We characterize the equilibrium wages and firm values. Quantitatively, our model can generate the dispersion of earnings within and across US firms.