Heterogeneity as a coordination device

Melvyn Coles and Jan Eeckhout

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: A model of directed search with a finite number of buyers and sellers is considered, where sellers compete in direct mechanisms. Buyer heterogeneity and Nash equilibrium results in perfect sorting. The restriction to complementary inputs, that the match value function Q is supermodular, in addition coordinates the sellers’ strategies. In that case, equilibrium implements positive assortative matching, which is efficient and consistent with the stable (cooperative equilibrium) outcome. This provides a non-cooperative and decentralized solution for the Assignment Game. Conversely, if buyers are identical, no such coordination is possible, and there is a continuum of equilibria, one of which exhibits price posting, another yields competition in auctions.

Keywords: Matching; assignment game; directed search; supermodularity; truthful equilibrium (search for similar items in EconPapers)
JEL-codes: C7 D4 (search for similar items in EconPapers)
Date: 2000-02
New Economics Papers: this item is included in nep-evo
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Citations: View citations in EconPapers (9)

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