A Two-Stage Model of Assignment and Market

Abstract

Centralized matching mechanisms and decentralized markets have been widely studied to allocate indivisible objects. However, they have been analyzed separately. The present paper proposes a new framework, by explicitly formulating a two-stage model where objects are allocated through a matching mechanism in the first stage and traded in the second stage market. In addition, one divisible good called money may or may not be available in the market. Every player demands at most one unit of object besides money. The players may face different priorities at each object type in the first stage. Each object type has a limited amount of capacity, called quota. Each player has a quasi-linear utility function.
The present analysis sets forth the equivalence conditions under which stability and efficiency are attained in equilibrium.

Keywords: two-stage economy, deferred acceptance algorithm (DA), market, indivisible object, perfect market equilibrium (PME), priority, stability, cyclical priority, unreversed priority, minimal demand

JEL Classification: C78, D41, D47, D51