Risk Sharing, Sorting, and Early Contracting

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Abstract

In an assignment market with uncertainty regarding productive ability of participants, early contracting can occur as participants balance risk sharing and sorting efficiency. More promising agents may contract early with each other because insurance gains outweigh sorting inefficiency, whereas less promising agents wait. It can also happen in equilibrium that more promising job applicants contract early with less promising firms. Such worker‐driven equilibria may arise when applicants are more risk‐averse, have greater uncertainty regarding their quality, or face a tighter market and when production exhibits increasing returns to firms’ qualities. Early contracting then unambiguously hurts the more promising firms that choose to wait.

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