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
|Date of creation:||2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:red:sed004:89. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.