Theoretical and Behavioural Economics Seminar - Matan Tsur (Bristol)

Abstract: We study a model where heterogeneous agents invest in skills and then enter a two-sided matching market which has search frictions. In every period, agents incur an additive search cost, pairs meet at random, and can either accept and bargain over the joint output or reject and continue searching for a better match. Potential sources for inefficiencies are the hold-up problem and mismatches between skills. Despite these, we prove a second welfare theorem: the constrained efficient allocation is an equilibrium. Furthermore, we establish a general assortative matching result, provide conditions for equilibrium uniqueness, and characterize equilibria in symmetric two-skill economies. Finally, we show that the efficient outcome can be discriminatory in the marriage market.

Location: Physics A1/3

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