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Stable Matching under Forward-Induction Reasoning

Pomatto, Luciano (2018) Stable Matching under Forward-Induction Reasoning. . (Unpublished)

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A standing question in the theory of matching markets is how to define stability under incomplete information. The crucial obstacle is that a notion of stability must include a theory of how beliefs are updated in a blocking pair. This paper proposes a novel epistemic approach. Agents negotiate through offers. Offers are interpreted according to the highest possible degree of rationality that can be ascribed to their proponents, in line with the principle of forward-induction reasoning. This approach leads to a new definition of stability. The main result shows an equivalence between this notion and “incomplete-information stability”, a cooperative solution concept recently put forward by Liu, Mailath, Postlewaite and Samuelson (2014), for markets with one-sided incomplete information. The result implies that forward-induction reasoning leads to efficient matchings under standard supermodularity conditions. In addition, it provides an epistemic foundation for incomplete-information stability. The paper also shows new connections and distinctions between the cooperative and the epistemic approaches in matching markets.

Item Type:Report or Paper (Working Paper)
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Pomatto, Luciano0000-0002-4331-8436
Additional Information:The paper is a substantial revision of an earlier paper of the same title. I am indebted to Alvaro Sandroni and Marciano Siniscalchi for many useful discussions. I thank Pierpaolo Battigalli, Yi-Chun Chen, George Mailath, Willemien Kets, Larry Samuelson, Rakesh Vohra and several seminar audiences for helpful comments on earlier drafts. All errors are my own.
Record Number:CaltechAUTHORS:20190405-110407806
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:94503
Deposited By: Tony Diaz
Deposited On:05 Apr 2019 18:26
Last Modified:03 Oct 2019 21:04

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