22 Pages Posted: 27 Feb 2014 Last revised: 28 Aug 2017
Date Written: August 27, 2017
This paper initiates the investigation of pre-matching gambles. Examples of pre-matching gambles include occupational choices before the marriage market, college major choices before the labor market, and financial portfolio management to attract future investors. I show that people take risky investments they would have not taken if not for their subsequent participation in competitive matching markets. A fundamental and unique feature of the competitive matching market, which I call the competitive rematching effect, drives pre-matching gambling. The paper then illustrates the inevitable relationship between social efficiency and inequality in this setting, and shows how progressive taxation in the matching market eliminates social inefficiency, reduces inequality, and generates government revenue.
Keywords: risk taking, competitive rematching effect, efficiency and inequality, progressive taxation
JEL Classification: C78, D31, J41
Suggested Citation: Suggested Citation