Knowledge Economies

About this event

We develop a general framework for knowledge economies which feature occupational choice between workers and managers and many-to-one matching of workers to managers into firms whose production depends on members' knowledge. The framework is flexible and nests several existing models as special cases. We establish existence of a stable outcome and show that, in our setting, stability is equivalent to competitive equilibrium and surplus maximization. We provide sufficient conditions under which stable outcomes admit a sharp characterization featuring positive assortativeness, occupation stratification, and strictly increasing earnings, and we show that these conditions hold in a range of knowledge economies. Quantitatively, the model in Garicano and Rossi-Hansberg (2004) accounts for U.S. wage polarization over 1988-2008, but a more flexible model is needed to account for both wage polarization and the U.S. establishment-size distribution. The flexible economy also replicates top income shares and their evolution remarkably well.