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The feedback effect in two-sided markets with bilateral investments

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  • Dizdar, Deniz
  • Moldovanu, Benny
  • Szech, Nora

Abstract

Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling privately known, complementary types, the investments also directly benefit the match partner. The bilateral external benefits induce a complex feedback cycle that amplifies the agents' signaling investments. Our main results quantify how the feedback effect depends on the numbers of competitors on both sides of the market. This yields detailed insights into the equilibria of two-sided matching contests with incomplete information, in particular for markets of small or intermediate size. It also allows us to shed some new light on the relationship between finite and continuum models of pre-match investment.

Suggested Citation

  • Dizdar, Deniz & Moldovanu, Benny & Szech, Nora, 2019. "The feedback effect in two-sided markets with bilateral investments," Journal of Economic Theory, Elsevier, vol. 182(C), pages 106-142.
    • Handle: RePEc:eee:jetheo:v:182:y:2019:i:c:p:106-142
    DOI: 10.1016/j.jet.2019.04.002
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    Cited by:

    1. Aner Sela, 2020. "Two-Stage Matching Contests," Working Papers 2005, Ben-Gurion University of the Negev, Department of Economics.
    2. Aner Sela, 2023. "All-pay matching contests," International Journal of Game Theory, Springer;Game Theory Society, vol. 52(2), pages 587-606, June.
    3. Chen Cohen & Ishay Rabi & Aner Sela, 2022. "Assortative Matching by Lottery Contests," Games, MDPI, vol. 13(5), pages 1-20, September.
    4. Zhang, Hanzhe, 2020. "Pre-matching gambles," Games and Economic Behavior, Elsevier, vol. 121(C), pages 76-89.
    5. Chen Cohen & Ishay Rabi & Aner Sela, 2020. "Assortative Matching Contests," Working Papers 2004, Ben-Gurion University of the Negev, Department of Economics.

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    More about this item

    Keywords

    Matching; Signaling; Investment; Feedback effect;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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