Creator: Cole, Harold Linh, 1957-, Mailath, George Joseph, and Postlewaite, A. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 253 Abstract:
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 made 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.
Keyword: Matching models, Hold-up problems, Investment, and Contracting Subject (JEL): C70 - Game Theory and Bargaining Theory: General, D52 - Incomplete Markets, and D20 - Production and Organizations: General
Creator: Cole, Harold Linh, 1957-, Mailath, George Joseph, and Postlewaite, A. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 213 Abstract:
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.
Keyword: Growth, Social norms, Efficiency, Class, and Social competition Subject (JEL): C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games, A10 - General Economics: General, D31 - Personal Income, Wealth, and Their Distributions, B40 - Economic Methodology: General, and D90 - Micro-Based Behavioral Economics: General