Assortative matching through signals
We model signalling in two-sided sequential search with heterogeneous agents and transferable utility. Search via meetings is time-consuming and thereby costly due to discounting. Search via signals is costless, so that agents can avoid almost all search costs if only the signals are truthful. We show that signals will indeed be truthful if the match output function is su ciently super- modular. The unique separating equilibrium is then characterised by perfect positive assortative matching despite the search frictions. In this equilibrium, agents successfully conclude their search after a single meeting, and overall match output is maximised. These results continue to hold when there are also explicit search costs in addition to discounting.
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