Unraveling of Dynamic Sorting

ettore domiano, university of toronto
hao li, university of toronto
wing suen, university of hongkong

Abstract

We consider a two-sided, finite-horizon model of search and matching with heterogeneous types and complementarity between types. The quality of the pool of potential matches deteriorates as agents who have found mutually agreeable matches exit the market. With automatic participation of all agents in each round, the market performs a sorting function in that attractive types of agents have multiple chances to meet and match with their peers. However, the sorting function of the market is lost if agents incur an arbitrarily small cost in order to participate in each round. The market unravels as almost all agents rush to participate in the first round and match and exit with anyone they meet.