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The Multiplier Effect in Two-Sided Markets with Bilateral Investments

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  • Benny Moldovanu

    ()

  • Deniz Dizdar

    ()

  • Nora Szech

    ()

Abstract

Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling private, complementary types, investments generate direct benefits for partners. We explore quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their own rank and about the types and investments of potential partners. We characterize how the multiplier effect hinges on market size, and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition.

Suggested Citation

  • Benny Moldovanu & Deniz Dizdar & Nora Szech, 2018. "The Multiplier Effect in Two-Sided Markets with Bilateral Investments," CRC TR 224 Discussion Paper Series crctr224_2018_030, University of Bonn and University of Mannheim, Germany.
  • Handle: RePEc:bon:boncrc:crctr224_2018_030
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    File URL: https://www.crctr224.de/en/research-output/discussion-papers/discussion-papers-2018#DP30
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    1. repec:aea:aejmic:v:10:y:2018:i:3:p:86-123 is not listed on IDEAS
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    Keywords

    two-sided matching; signaling; investment; multiplier effect;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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