Working Paper: CEPR ID: DP5543
Authors: Heidrun C. Hoppe; Benny Moldovanu; Aner Sela
Abstract: We study two-sided markets with a finite numbers of agents on each side, and with two-sided incomplete information. Agents are matched assortatively on the basis of costly signals. A main goal is to identify conditions under which the potential increase in expected output due to assortative matching (relative to random matching) is completely offset by the costs of signalling. We also study how the signalling activity and welfare on each side of the market change when we vary the number of agents and the distribution of their attributes, thereby displaying effects that are particular to small markets. Finally, we look at the continuous version of our two-sided market model and establish the connections to the finite version. Technically, the paper is based on the very elegant theory about stochastic ordering of (normalized) spacings and other linear combinations of order statistics from distributions with monotone failure rates, pioneered by R. Barlow and F. Proschan (1966, 1975) in the framework of reliability theory.
Keywords: matching; signalling
JEL Codes: C7; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| assortative matching based on costly signals (C78) | aggregate output (E10) |
| increasing the number of agents on the long side of the market (L85) | expected matching output (C67) |
| entry on the short side (Y60) | higher expected values for agents on that side (L85) |
| distributions are decreasing failure rate (DFR) (D39) | total signalling efforts and welfare on both sides of the market (D69) |
| distributions are increasing failure rate (IFR) (D39) | signalling efforts and total welfare (D69) |
| individuals with low types (J79) | preference for random matching (C78) |
| individuals with higher types (B00) | benefit from assortative matching (C78) |