Investment and Competitive Matching

88 Pages Posted: 16 Apr 2014 Last revised: 6 Nov 2014

See all articles by Georg Nöldeke

Georg Nöldeke

University of Basel; University of Basel

Larry Samuelson

Yale University - Department of Economics; Yale University - Cowles Foundation

Date Written: November 5, 2014

Abstract

We study markets in which agents first make investments and are then matched into potentially productive partnerships. Equilibrium investments and the equilibrium matching will be efficient if agents can simultaneously negotiate investments and matches, but we focus on markets in which agents must first sink their investments before matching. Additional equilibria may arise in this sunk-investment setting, even though our matching market is competitive. These equilibria exhibit inefficiencies that we can interpret as coordination failures. All allocations satisfying a constrained efficiency property are equilibria, and the converse holds if preferences satisfy a separability condition. We identify sufficient conditions (most notably, quasiconcave utilities) for the investments of matched agents to satisfy an exchange efficiency property as well as sufficient conditions (most notably, a single crossing property) for agents to be matched positive assortatively, with these conditions then forming the core of sufficient conditions for the efficiency of equilibrium allocations.

Keywords: Matching, Investment, Coordination failure, Positive assortative matching, Efficiency

JEL Classification: C7, D5

Suggested Citation

Nöldeke, Georg and Samuelson, Larry, Investment and Competitive Matching (November 5, 2014). Cowles Foundation Discussion Paper No. 1946, Available at SSRN: https://ssrn.com/abstract=2424819 or http://dx.doi.org/10.2139/ssrn.2424819

Georg Nöldeke

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

Larry Samuelson (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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