Repeated matching, career concerns, and firm size

Abstract

I propose a two-period matching model of firms and managers to show that managerial career concerns may not guarantee assortative matching in the labor market for managers. In the model, firms compete for managerial talent, and managers are concerned about their reputations. The market updates managers’ reputations whenever their performance is publicly disclosed, which leads to rematching in a subsequent period. I show that some talented managers sit out the market in an earlier period to secure their reputations in a later period. The size distribution of firms—by influencing the wage distribution of managers—is a key determinant of early sitting out: managers’ sitting out may happen under a Power-law distribution of firm size, whereas it never happens under a uniform distribution. The model highlights the roles of firm size distributions and the effects of labor markets on incentive provision within firms.