A large segment of the economic literature is concerned with the study of allocations that arise when markets are not well functioning. The defining characteristics of this literature are its focus on informational and spatial frictions and the desire to make them explicit by assuming that economic interactions occur in small coalitions. The traditional modeling tool is that of a matching framework. A limitation of this literature is that the treatment of matching--as a technology--is mostly descriptive and hazily formalized. These shortcomings contribute to blur the precise connection between the constraints imposed by the matching technology, the environmental frictions, and the possible allocations. The proposed research will develop a fully integrated mathematical approach to matching mechanisms by formalizing and studying the following: (i) the mechanics of matching in bi- and multi-lateral settings (deterministic and stochastic); (ii) the links between matching and trade frictions, providing exact mappings between technologies and informational constraints; (iii) the allocative implications of different matching mechanisms in general monetary and non-monetary economies. A clear understanding of these connections will advance the formulation of sophisticated economic models based on markets with impaired functioning and promises to clarify the implications of policy.
A major concern of economics is how scarce resources are allocated when markets are not well functioning. Market frictions often involve scarcity of information or geographical separation or inadequate institutions. In general, the economic literature makes these frictions explicit by modeling trade as occurring in small groups--often pairwise matches. The resulting matching frameworks are used to answer basic questions in a variety of settings; from economic governance to unemployment and from business cycles to monetary policy. A shortcoming of these frameworks is that the modeling of matching technologies is mostly descriptive and superficially formalized. This blurs the exact link between the obstacles faced by participants in the market place and the trades they can execute. The proposed research will develop a theoretical foundation for this class of models. It will formalize the mechanics of how different trading frameworks can facilitate (or obstacle) the exchange of information and other economic resources. It will precisely chart the link between the frictions impinging on the trading process and the possible allocations. This will advance our understanding of how to construct sophisticated economic models whose central trait is markets with impaired functioning. The results will have applications to other disciplines, such as biology (spread of diseases), sociology (formation of social groups), and engineering (network communication).
