Mismatch, Rematch, and Investment

Joint with: Patrick Legros and Andy Newman

In markets where payoffs depend on the assignment of agents, restrictions on side payments to partners (nontransferable utility) tend to preclude efficient matching. This provides a rationale for associational redistribution: a re-match of agents away from the equilibrium outcome may raise aggregate social surplus. Often individuals' productive types are determined by investments before the match. Nontransferable utility typically distorts these investments and may induce overinvestment at the top and underinvestment at the bottom; this occurs despite symmetric information about agents' characteristics. Policies mitigating the static inefficiency due to mismatch may have undesirable dynamic incentive effects. Moreover, if investment itself takes place in a matching environment (e.g. schools), the effects can be exacerbated. We study several policies of associational redistribution that have empirical counterparts, assessing the differential effects of early-stage and later-stage interventions.

For more information, contact Philipp Kircher.