Discussion paper
DP13258 The Feedback Effect in Two-Sided Markets with Bilateral Investments
Agents in a finite two-sided market are matched assortatively, based on costly
investments. Besides signaling privately known, complementary types, the investments
also directly benefit the match partner. The bilateral external benefits induce
a complex feedback cycle that amplifies the agents’ signaling investments. Our
main results quantify how the feedback effect depends on the numbers of competitors
on both sides of the market. This yields detailed insights into the equilibria of
two-sided matching contests with incomplete information, in particular for markets
of small or intermediate size. It also allows us to shed some new light on the
relationship between finite and continuum models of pre-match investment.
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