Heterogeneity as a Coordination Device

UPF Economics & Business Working Paper No. 510

38 Pages Posted: 3 Nov 2000

See all articles by Melvyn G. Coles

Melvyn G. Coles

University of Essex - Department of Economics; Autonomous University of Barcelona; IZA Institute of Labor Economics

Jan Eeckhout

University College London - Department of Economics

Date Written: 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 seller' 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 Classification: C7, D4

Suggested Citation

Coles, Melvyn G. and Eeckhout, Jan, Heterogeneity as a Coordination Device (February 2000). UPF Economics & Business Working Paper No. 510, Available at SSRN: https://ssrn.com/abstract=248682 or http://dx.doi.org/10.2139/ssrn.248682

Melvyn G. Coles

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206 873333 (Phone)
+44 1206 872724 (Fax)

Autonomous University of Barcelona

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
SPAIN

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jan Eeckhout (Contact Author)

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom