This award funds new economic theory on matching in environments with incomplete information. Matching models use techniques from game theory to study situations in which two partners must be 'matched' in order to make a trade. Examples include matching workers to employers and matching students to schools.
The project has two parts. The first part studies agents' incentives to invest in productive characteristics. In many situations, the value of a match depends on investments the partners have made before their match. For example, the value of a match between a teacher and a school depends on the teacher's education, training and experience. It also depends on the physical equipment and facilities available at the school. Both parties must invest before the match, but they may not have incentives to invest if they fear that their future partners will take advantage of their investment through the well-known 'hold up problem'. Here, the PIs will consider how specific bargaining protocols and property rights can lead to efficient investments.
The second part of the research considers the implications of stability of matching outcomes under incomplete information. There is a large literature that uses matching models to analyze a broad variety of applications. The commonly employed solution concept in these applications is the core. The use of the core as a solution concept incorporates the stability of a proposed matching between workers and firms; if the proposed outcome is not in the core we would expect the outcome to be upset by the pair that could jointly improve their circumstances. This argument, however, relies on an assumption of complete information. The PIs develop a concept that defines pairwise stability in incomplete information environments. They investigate the robustness of various models to incomplete information and consider many-to-one matching problems. This project provides better foundations for the large applied literature in matching.
Existing theories of matching have had substantial broader impact through their application to market design. These methods are used to match students to schools, medical graduates to residencies, and transplant donors to recipients. The new theory may improve the economic performance of these mechanisms.
