Matt Elliott and Francesco Nava

Published 10 July 2015

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This paper studies market clearing in matching markets. Bargaining in such markets occurs in the context of alternative possible matches that provide endogenous outside options. We ask when will such markets clear efficiently and find inefficiencies, delay and mismatch, to be pervasive. The model is non-cooperative, fully decentralized, and in Markov strategies. Workers and firms bargain with each other to determine who will be matched to whom and on what terms of trade. Once a worker?firm pair reach agreement they exit the market. Delay can extensive and structured with vertically differentiated markets endogenously clearing form the top down. We find mismatch occurs whenever an agent is at risk of loosing a binding endogenous outside option. In both cases inefficiencies are driven by the endogenous evolution of the market.