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Unraveling of Dynamic Sorting

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  • Ettore Damiano
  • Hao Li

Abstract

We consider a two-sided, finite-horizon model of search and matching with heterogeneous types and complementarity between types. The quality of the pool of potential matches deteriorates as agents who have found mutually agreeable matches exit the market. With automatic participation of all agents in each round, the market performs a sorting function in that attractive types of agents have multiple chances to meet and match with their peers. However, the sorting function of the market is lost if agents incur an arbitrarily small cost in order to participate in each round. The market unravels as almost all agents rush to participate in the first round and match and exit with anyone they meet.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 174.

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Date of creation: 2004
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Handle: RePEc:red:sed004:174

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Keywords: Random matching; Search externality; Endogenous participation; complementarity;

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  15. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(1), pages 163-79, February.
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