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|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
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