Stability of Marriage with Externalities

Abstract

In many matching problems, it is natural to consider that agents may have preferences not only over the set of potential partners but also over what other matches occur. Once such externalities are considered, the set of stable matchings will depend on what agents believe will happen if they deviate. In this paper, we introduce endogenously generated beliefs (which depend on the preferences). We introduce a particular notion of endogenous beliefs, called sophisticated expectations, and show that with these beliefs, stable matchings always exist.

Keywords: Cooperative games, matchings, externalities

JEL Classification: C71, C78, D62