Bundling Incentives in (Many-to-Many) Matching with Contracts

Abstract

In many-to-many matching with contracts, the way in which contracts are specified can affect the set of stable equilibrium outcomes. Consequently, agents may be incentivized to modify the set of contracts upfront. We consider one simple way in which agents may do so: unilateral bundling, in which a single agent links multiple contracts with the same counterparty together. We show that essentially no stable matching mechanism eliminates incentives for unilateral bundling. Moreover, we find that unilateral bundling can sometimes lead to Pareto improvement―and other times produces market power that makes one agent better off at the expense of others.

Keywords: Matching with contracts, Contract design, Bundling-proofness, Substitutability

JEL Classification: C62, C78, D44, D47