Paper #510

Title:

Heterogeneity as a coordination device

Authors:

Melvyn G. Coles and Jan Eeckhout

Date:

February 2000

Abstract:

A model of directed search with a finite number of buyers and sellers is considered, where sellers compete in direct mechanisms. Buyer heterogeneity and Nash equilibrium results in perfect sorting. The restriction to complementary inputs, that the match value function Q is supermodular, in addition coordinates the sellers’ strategies. In that case, equilibrium implements positive assortative matching, which is efficient and consistent with the stable (cooperative equilibrium) outcome. This provides a non-cooperative and decentralized solution for the Assignment Game. Conversely, if buyers are identical, no such coordination is possible, and there is a continuum of equilibria, one of which exhibits price posting, another yields competition in auctions.

Keywords:

Matching, assignment game, directed search, supermodularity, truthful equilibrium

JEL codes:

C7, D4

Area of Research:

Microeconomics

Published in:

Journal of Economic Theory, 111, pp. 265-276, 2003
With the title:
Indeterminacy and Directed Search

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