Paper # Author Title  
This paper addresses the question of whether agents will invest efficiently in attributes that will increase their productivity in subsequent matches with other individuals. We present a two-sided matching model in which buyers and sellers make investment decisions prior to a matching stage. Once matched, the buyer and seller bargain over the transfer price. In contrast to most matching models, preferences over possible matches are affected by decisions taken before the matching process. We show that if bargaining respects the existence of outside options (in the sense that the resulting allocation is in the core of the assignment game), then efficient decisions can always be sustained in equilibrium. However, there may also be inefficient equilibria. Our analysis identifies a potential source of inefficiency not present in most matching models. Download Paper
We analyze a model in which there is socially inefficient competition among people. In this model, self-enforcing social norms can potentially control the inefficient competition. However, the inefficient behavior often cannot be suppressed in equilibrium among those with the lowest income due to the ineffectiveness of sanctions against those in the society with the least to lose. We demonstrate that in such cases, it may be possible for society to be divided into distinct classes, with inefficient behavior suppressed in the upper classes but not in the lower. Download Paper
We develop a simple model that captures a concern for relative standing. The concern for relative standing is instrumental in the sense that individ­ uals do not get utility directly from their relative standing, but rather, the concern is induced because relative standing affects consumption of stan­ dard commodities. We investigate the consequences of a concern for relative wealth in models in which individuals are making labor-leisure choice deci­ sions. Among the results, we show how individuals' decisions are affected by the aggregate income distribution and how the concern for relative wealth can generate behavior that can be interpreted as conspicuous consumption when wealth is not directly observable. Download Paper
Investors making complementary investments typically do not have incentives to invest efficiently when they cannot contract with each other prior to their decisions because of the hold-up problem: when they bargain over the surplus generated by their investments, they will usually not obtain the full fruits of the investment. Intuitively, the hold-up problem should be ameliorated if, in the bargaining stage, each agent has alternatives to the partner he is bargaining with. We characterize the matching and division of surplus in finite economies for any initial investment decisions. We provide conditions on those decisions that guarantee that each agent will capture the change in the aggregate social surplus that results from any investment change he makes. We further show that for any given problem, there exists a bargaining rule by which pairs split their surplus that will support efficient investment choices in equilibrium. We also show, however, that over invest­ment or underinvestment can occur for natural bargaining rules. Download Paper
Economists typically analyze individuals' market behavior in isolation from their nonmarket decisions. While this research strategy has generally been successful, it can lead to systematic errors when agents' nonmarket behavior affects their market choices. In this paper we analyze how individuals' investment behavior changes as a result of nonmarket behavior. Specifically, we analyze a model in which individuals must decide how to al­ locate their initial endowment between two random investments, where the returns are perfectly correlated across individuals for the first investment but independent across individuals for the second. We consider an environment in which men and women match, with wealthier individuals more successful in matching. We show how individuals' concern about relative wealth can affect their investment decisions, and we provide conditions under which individuals bias their investments either toward or away from the investment with correlated returns. A modification of the model is used to explain why agents’ investments might exhibit a home country bias. Download Paper
Do investors making complementary investments face the correct incen­tives, especially when they cannot contract with each other prior to their de­cisions? We present a two-sided matching model in which buyers and sellers make investments prior to matching. Once matched, buyer and seller bar­ gain over the price, taking into account outside options. Efficient decisions can always be sustained in equilibrium. We characterize the inefficiencies that can arise in equilibrium, and show that equilibria will be constrained efficient. We also show that the degree of diversity in a large market has implications for the extent of any inefficiency. Download Paper