Matching with Externalities

Abstract

We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to allow for externalities, we establish that stable matchings exist when agent choices satisfy substitutability. In addition, we show that the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, remain valid despite the presence of externalities even though the standard fixed-point techniques do not apply. Furthermore, we establish novel comparative statics on externalities.