Investment and Matching

Abstract

This paper examines a market in which buyers and sellers must first make investments, and then match to produce and split a surplus whose size is determined by their investments.We are especially interested in identifying conditions under which the post-investment matching process created incentives for the agents to take efficient investments.We identify fairly general conditions under which there exists an equilibrium in which investments are efficient, as well as equilibria featuring inefficient investments.We identify somewhat more restrictive conditions under which equilibria are “constrained efficient,” allowing us to characterize inefficient investments as reflecting either coordination failures or missing markets.We also provide a more general proof of the existence of equilibrium that clarifies the underlying economic forces, and we draw connections to implementation in principal-agent problems.