Cupid's Invisible Hand: Social Surplus and Identification in Matching Models
AbstractWe investigate a matching game with transferable utility when some of the characteristics of the players are unobservable to the analyst. We allow for a wide class of distributions of unobserved heterogeneity, subject only to a separability assumption that generalizes Choo and Siow (2006). We first show that the stable matching maximizes a social gain function that trades of two terms. The first term is simply the average surplus due to the observable characteristics; and the second one can be interpreted as a generalized entropy function that reflects the impact of the unobserved characteristics. We use this result to derive simple closed-form formulæ that identify the joint surplus in every possible match and the equilibrium utilities of all participants, given any known distribution of unobserved heterogeneity. Moreover, we show that if transfers are observed, then the pre-transfer utilities of both partners are also identified. We conclude by discussing some empirical approaches suggested by these results for the study of marriage markets, hedonic prices, and the market for CEOs.
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Bibliographic InfoPaper provided by Columbia University, Department of Economics in its series Discussion Papers with number 1011-03.
Date of creation: 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-04 (All new papers)
- NEP-GTH-2011-06-04 (Game Theory)
- NEP-UPT-2011-06-04 (Utility Models & Prospect Theory)
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- Arnaud Dupuy & Alfred Galichon, 2012.
"Personality Traits and the Marriage Market,"
2012/41, Maastricht School of Management.
- Nicolas Jacquemet & Jean-Marc Robin, 2013. "Assortative matching and search with labour supply and home production," CeMMAP working papers CWP07/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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