Stability of marriage with externalities

In many matching problems, it is natural to consider that agents may have preferences not only over the set of potential partners but over the whole matching. Once such externalities are considered, the set of stable matchings will depend on what agents believe will happen if they deviate. Sasaki and Toda (1996, J. of Econ. Theory, 70, 93) have examined the existence of stable matchings when the beliefs are exogenously speci…ed and shown that stable matchings do not always exist. In this paper, we argue that beliefs should be endogenously generated, that is, they should depend on the preferences. We introduce a particular notion of endogenous beliefs, called sophisticated expectations, and show that with these beliefs, stable matchings always exist. JEL Classi…cation Numbers: C71, C78, D62.