The Feedback Effect in Two-Sided Markets with Bilateral Investments
Deniz Dizdar, Benny Moldovanu and Nora Szech
Journal of Economic Theory, 2019, Vol 182, 106-142; DOI: 10.1016/j.jet.2019.04.002
- Date: July 2019
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.