Centralized Clearinghouse Design: A Quantity-Quality Tradeoff

30 Pages Posted: 1 Mar 2015 Last revised: 17 Jun 2016

See all articles by Nick Arnosti

Nick Arnosti

Columbia Business School - Decisions, Risk, and Operations Division

Date Written: January 1, 2016

Abstract

Stable matching mechanisms are used to clear many two-sided markets. In practice, these mechanisms leave many agents on both sides unmatched. What factors determine the number of unmatched agents, and the quality of matches that do form? This paper answers this question, with a particular focus on how match outcomes depend on correlations in agent preferences. I consider three canonical preference structures: fully idiosyncratic preferences, common preferences (agents agree on the attractiveness of those on the opposite side), and aligned preferences (potential partners agree on the attractiveness of their match).

I find that idiosyncratic preferences result in more matches than common preferences do. Perhaps more surprisingly, the case of aligned preferences results in the fewest matches. Regarding match quality, the story reverses itself: aligned preferences produce the most high quality matches, followed by common preferences. These facts have implications for the design of priority rules and tie- breaking procedures in school choice settings, as they point to a fundamental tradeoff between matching many students, and maximizing the number of students who get one of their top choices.

JEL Classification: D47, C78

Suggested Citation

Arnosti, Nick, Centralized Clearinghouse Design: A Quantity-Quality Tradeoff (January 1, 2016). Available at SSRN: https://ssrn.com/abstract=2571527 or http://dx.doi.org/10.2139/ssrn.2571527

Nick Arnosti (Contact Author)

Columbia Business School - Decisions, Risk, and Operations Division ( email )

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New York, NY 10027
United States

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