Making Marketplaces Safe: Dominant Individual Rationality and Applications to Market Design

Abstract

Often market designers cannot force agents to join a marketplace rather than using preexisting institutions. We propose a new desideratum for marketplace design that guarantees the safety of participation: Dominant Individual Rationality (DIR). A marketplace is DIR if every pre-existing strategy is weakly dominated by some strategy within the marketplace. We study applications to the design of labor markets and the sharing economy. We also provide a general construction to achieve approximate DIR across a wide range of marketplace designs.

JEL Classification: D47, D82