Inefficient sorting under output sharing

Abstract

I study sorting in a frictional market. Asset owners post their terms, then workers direct their search. When the owners switch from prices to shares, the competition between workers is handicapped. The unique equilibrium features inefficient positive assortative matching. The queue lengths are distorted, even though the Hosios efficiency condition holds for every pair of types. For any distribution of types, all workers pair up with better assets. The best workers suffer while the weakest workers gain; the opposite occurs on the asset side. Competition drives the asset owners to post flatter contracts. It leads to constrained efficiency whenever prices are feasible. Otherwise, handicapped competition results in inefficient sorting.