Welfare and Strategic Externalities in Matching Markets with Interviews

Abstract

Recent debate in the medical literature has brought attention to issues with the pre-match interview process for residency and fellowship positions at hospitals. However, little is known about the economics of this decentralized process. In this paper, I build a game-theoretic model in which hospitals simultaneously decide on which doctors to interview, in order to learn their preferences over doctors. I show that increased interview activity by any hospital imposes an unambiguous negative welfare externality on all other hospitals. In equilibrium, both hospitals and doctors may be better off by a coordinated reduction in interview activity. The strategic externality is more subtle, and conditions are derived under which the game exhibits either strategic complementarities or substitutes. Moreover, an increase in market size may exacerbate the interview externalities, preventing agents from reaping the thick market benefits that would arise in the absence of the costly interviews. This effect increases participants' incentives to match outside of the centralized clearinghouse as markets become thicker, jeopardizing the long-term viability of the clearinghouse. The model also provides new insights into several market design interventions that have recently been proposed.

Keywords: Matching with Interviews, Market Design, Strategic Complementarities, Negative Welfare Externalities, Inefficient equilibrium, Residency match, NRMP, Market Thickness

JEL Classification: D81, D82, D61, D62, J01, M51, C63, C72, C78