Journal Article

The Theory of Assortative Matching Based on Costly Signals

Heidrun C. Hoppe, Benny Moldovanu and Aner Sela

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 1, pages 253-281
Published in print January 2009 | ISSN: 0034-6527
Published online January 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00517.x
The Theory of Assortative Matching Based on Costly Signals

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We study two-sided markets with a finite number of agents on each side, and with two-sided incomplete information. Agents are matched assortatively on the basis of costly signals. Asymmetries in signalling activity between the two sides of the market can be explained by asymmetries either in size or in heterogeneity. Our main results identify general conditions under which the potential increase in expected output due to assortative matching (relative to random matching) is offset by the costs of signalling. Finally, we examine the limit model with a continuum of agents and point out differences and similarities to the finite version. Technically, the paper is based on the elegant theory about stochastic order relations among differences of order statistics, pioneered by Barlow and Proschan in 1966 in the framework of reliability theory.

Keywords: C78; D82

Journal Article.  14064 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Information, Knowledge, and Uncertainy

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