Working Paper: CEPR ID: DP13994
Authors: Marek Pycia; M Bumin Yenmez
Abstract: We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to allow for externalities, we establish that stable matchings exist when agent choices satisfy substitutability. Furthermore, we show that substitutability is a necessary condition for the existence of a stable matching in a maximal-domain sense and provide a characterization of substitutable choice functions. In addition, we establish novel comparative statics on externalities and show that the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, remain valid despite the presence of externalities eventhough the standard fixed-point techniques do not apply.
Keywords: externalities; matching theory; stable matchings; two-sided markets
JEL Codes: C78; D47; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| substitutability condition (D10) | stable matchings (C78) |
| externalities (D62) | stability of matchings (C78) |
| stable matchings (C78) | Pareto efficiency (D61) |
| market conditions (P42) | side-optimal stable matchings (C78) |