Unraveling Results from Comparable Demand and Supply: An Experimental Investigation

Abstract

Markets sometimes unravel, with offers becoming inefficiently early. Often this is attributed to competition arising from an imbalance of demand and supply, typically excess demand for workers. However this presents a puzzle, since unraveling can only occur when firms are willing to make early offers and workers are willing to accept them. We present a model and experiment in which workers' quality becomes known only in the late part of the market. However, in equilibrium, matching can occur (inefficiently) early only when there is comparable demand and supply: a surplus of applicants, but a shortage of high quality applicants.Keywords: Matching, Unraveling, Experiments, Market Design, Labor Demand and Supply JEL Classification Numbers: C78, C90, D61 * The preliminary version of this study reporting pilot experiments and the latest version were presented at the ESA Meetings in Pittsburgh and Tucson, at the Winter ES Meeting in Philadelphia, and at NYU. We thank the participants for comments. Of course, all possible errors are our own responsibility. We used the Z-Tree software (Fischbacher, 2007) in our experiment. We would like to gratefully acknowledge the support of the NSF.

Decentralized matching markets with endogenous salaries

“…Thus, f 1 is indi¤erent between deviating and not deviating. 13 Firm f 2 has no incentive to deviate, since the equilibrium outcome is the best-case scenario for it. Firm f 3 has no incentive to make a countero¤er to a 2 , since it needs to pay s 0 2 > s 2 = 2 (the payo¤ by deviating is less than 4).…”

Strategic complementarities and unraveling in matching markets

“…In contrast, in a flexibletransfer regime, agents will not unravel. Niederle et al (2013) explain unraveling as the result of an imbalance between demand and supply. Unraveling arises when there is a surplus of applicants, but a shortage of high quality applicants.…”

Rigidity of Transfers and Unraveling in Matching Markets

“…The literature has come up with other reasons for unraveling in matching markets: over provision of information (Ostrovsky and Schwarz, 2010), strategic complementarity over the decision to match early (Echenique and Pereyra, 2014), correlation of matching preferences (Halaburda, 2010), search costs (Damiano, Hao, and Suen, 2005), exploding offers (Niederle and Roth, 2009), uncertainty about the imbalance between supply and demand (Niedrele, Roth, and Unver, 2010), and information flow in social network (Fainmesser, 2013). All of these papers work in the setting of fixed transfers, and it remains an open question if flexible transfers could mitigate unraveling through these channels.…”