Performance and Turnover in a Stochastic Partnership

This paper characterizes the social-welfare maximizing equilibrium of a “stochastic partnership matching market”, in which players paired to play a stochastic game may quit to be costlessly and anonymously re-matched. Patterns of performance and turnover in this equilibrium are consistent with the well-known “survivorship bias” and, if partners form “meaningful first impressions”, with the “honeymoon effect”. By contrast, maximizing social welfare in standard repeated games with re-matching typically requires that players receive low payoffs at the start of each relationship. Welfare and turnover comparative statics are also provided: higher partnership-states are associated with higher joint payoffs and, in the special case of an exogenous stochastic process, with both higher joint stage-game and joint continuation payoffs as well as longer-lasting relationships. ∗Fuqua School of Business and Economics Department, Duke University, Email: [email protected]. Post: Fuqua School of Business, 1 Towerview Road, Durham, NC 27708. I thank George-Marios Angeletos, James Anton, Michael Grubb, Johannes Horner, Rachel Kranton, Jonathan Levin, Bentley MacLeod, Roberto Rigobon, Justin Wolfers, participants at Gerzensee 2005 for helpful conversations, and especially Robert Gibbons for his advise and encouragement throughout a long gestation. National Science Foundation Grant #SES-0820051 and MIT’s Program on Innovation in Markets and Organizations provided financial support.