Market Based Incentive Compatibility

56 Pages Posted: 15 Apr 2019

See all articles by T. Tony Ke

T. Tony Ke

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Yuting Zhu

Massachusetts Institute of Technology (MIT)

Date Written: April 14, 2019

Abstract

We consider a decentralized matching market where buyers with private information about their quality preferences are matched with sellers of different service qualities. When posting their job requests, buyers can report their quality preferences via cheap talk, which influences sellers' application and pricing strategies. We show that the buyers' incentive compatibility conditions are always satisfied under the equilibrium market outcomes. The intuition is that by exaggerating one's quality preference, a buyer faces a higher expected price even though he attracts not only more applications from sellers, but also those with higher quality. We apply our theory to the freelance marketplace and evaluate two platform design policies that are intended to facilitate matches: allowing post-match renegotiations and enforcing strict positive assortative matching. We find that both policies may backfire by breaking down the buyers' incentive compatibility and giving rise to their pre-match information distortion.

Keywords: incentive compatibility, cheap talk, platform design, freelance, crowdsourcing

Suggested Citation

Ke, Tony and Zhu, Yuting, Market Based Incentive Compatibility (April 14, 2019). MIT Sloan Research Paper No. 5764-19. Available at SSRN: https://ssrn.com/abstract=3371935 or http://dx.doi.org/10.2139/ssrn.3371935

Tony Ke (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Yuting Zhu

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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