Managing Congestion in Matching Markets
Manufacturing and Service Operations Management, special issue on Sharing Economy and Innovative Marketplaces (Forthcoming)
70 Pages Posted: 23 Apr 2014 Last revised: 12 Nov 2019
Date Written: May 7, 2018
Participants in matching markets face search and screening costs when seeking a match. We study how platform design can reduce the effort required to find a suitable partner.
We study a game-theoretic model in which "applicants" and "employers" pay costs to search and screen. An important feature of our model is that both sides may waste effort: some applications are never screened, and employers screen applicants who may have already matched. We prove existence and uniqueness of equilibrium, and characterize welfare for participants on both sides of the market.
We identify that the market operates in one of two regimes: it is either screening limited or application limited. In screening-limited markets, employer welfare is low, and some employers choose not to participate. This occurs when application costs are low and there are enough employers that most applicants match, implying that many screened applicants are unavailable. In application-limited markets, applicants face a "tragedy of the commons" and send many applications that are never read. The resulting inefficiency is worst when there is a shortage of employers. We show that simple interventions -- such as limiting the number of applications that an individual can send, making it more costly to apply, or setting an appropriate market-wide wage -- can significantly improve the welfare of agents on one or both sides of the market.
Keywords: Matching markets, decentralized, market design, operational interventions, stochastic model, mean field limit, search frictions, equilibrium, dynamics, contraction
JEL Classification: D40, J41
Suggested Citation: Suggested Citation