Market Based Incentive Compatibility
56 Pages Posted: 15 Apr 2019
Date Written: April 14, 2019
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
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