Flanders, Sam and Melati Nungsari, 2019. “Quality Versus Fit: Market Design and Externalities on Multidimensional Matching Platforms.” Working Paper.

Sam Flanders & Melati Nungsari | ASB Faculty | Research Paper

Discpline: Economics

Abstract
This paper studies externalities in one-to-one matching markets when agents have preferences over multidimensional types by utilizing a minimal search setting where agents are either high or low quality and have an idiosyncratic per-match “fit” shock. if Applications include dating and marriage, job search, and school choice. fi It identifies a novel source of externalities that does not exist in the one-dimensional models focused on in the previous literature, but is endemic in multidimensional settings, appearing in both search and frictionless matching models so long as nontransferabilities are present. Agents match too aggressively on traits where preferences are homogeneous across agents (textit{quality}), and too little on traits where preferences are heterogeneous across agents (textit{fit}). This effect is decomposed into an textit{intermatch externality} — when you match to someone, you impose a cost on the rest of the market by removing them from it, and an textit{intramatch externality} — you don’t account for your partner’s payoffs when choosing partners. Given these generic externalities, we provide a survey of instruments a matching platform could use to improve surplus, analyzing for each the efficiency properties of the solution and its ease of implementation under a variety of assumptions. These instruments include having the platform act as a middle-man to make the transfers that agents cannot make directly make, utilizing two-part tariffs, splitting the platform along quality, and censoring agents’ choice sets (i.e. curating the set of partners they can see on the platform).