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Fashion Statement

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Author Info
Ted Temzelides

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Abstract

We study a dynamic bilateral matching model with private information about agents' characteristics. These characteristics affect the quality of a match and, as a result, the payoffs of both matching partners. Assortative matching maximizes total welfare. The outcome of the matching process can be improved if a payoff-irrelevant (sunspot) variable which we term ``fashion'' is introduced. Agents that are informed of the realization of the sunspot variable, modelled as a number (or ''color'') in the interval [0,1], choose to adopt it as a label that identifies them to other informed agents. If only productive agents are informed of the trend, assortative matching results. If success in matching is observed, other, less productive, agents learn to imitate the productive ones. Therefore, we show that for fashion to be useful, it needs to constantly change. If fashion is costly to acquire, we demonstrate the existence of a ``separating equilibrium'' in which only the productive agents acquire the ever changing fashion in every period. This equilibrium matching rule achieves assortative matching and maximizes total welfare

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 89.

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Date of creation: 2004
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Handle: RePEc:red:sed004:89

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Related research
Keywords: assortative matching; sunspots;

Find related papers by JEL classification:
D - Microeconomics

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This page was last updated on 2009-12-2.

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