Abstract:

The role of information aggregation within firm in isolation has long been recognized. Here instead, we analyze competition in the labor market and how it shapes organizations. Will the well informed match with those who are well informed or will they mix with the less informed? This is important because it provides a rationale for the observed worker composition in a cross-section of firms. We find that in equilibrium, the allocation consists of a maximally diversified work force within the firm, while it minimizes the informational difference between firms. Even if hiring the best is most informative, it is optimal to configure diverse teams given competitive prices. The value of information is submodular in types, and the diverse allocation is a generalization of negative assortative matching (NAM) in one-to-one matching to a multi-agent setting, team-NAM. We analyze the allocation in the presence of endogenous firm size, heterogeneity in productivity, and under correlation of the agents' information.