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Assignment Games with Externalities And Matching-Based Competition

  • Bo Chen

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    We develop a model of assignment games with pairwise-identity-dependent externalities. A concept of conjectural equilibrium is proposed, and the universal conjecture is shown to be the necessary and sufficient condition for the general existence of equilibrium. We then apply the solution concept to a matching-based Cournot model in which the unit production cost of a firm depends on both the technology of the firm and the human capital of the manager hired, and show that if technology and human capital are complementary, the positive assortative matching (PAM) is a stable matching under rational expectations, or even if firm technology and human capital are substitutable yet the substitutive effect is dominated by the marginal effects of technology and human capital, the PAM is still a rational stable matching.However, if the substitutive effect on the unit production cost is sufficiently strong or the market demand is sufficiently high, the negative assortative matching is a rational stable matching.

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    File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse08_2013.pdf
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    Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse08_2013.

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    Length: 40
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:bon:bonedp:bgse08_2013
    Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

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