Decentralized Bargaining in Matching Markets: Efficient Stationary Equilibria and the Core

This paper studies market clearing in matching markets. The model is non-cooperative, fully decentralized, and in Markov strategies. Workers and firms bargain with each other to determine who will be matched to whom and at what terms of trade. Once a worker-firm pair reach agreement they exit the market. Alternative possible matches affect agents’ bargaining positions. We ask when do such markets clear efficiently and find that inefficiencies – mismatch and delay – often feature. Mismatch occurs whenever an agent’s bargaining position is at risk of deteriorating. Delay occurs whenever agents expect their bargaining position to improve. Delay can be extensive and structured with vertically differentiated markets endogenously clearing from the top down. ∗We thank Kevin Li for excellent research assistance, the editor and referees for their useful suggestions, and the numerous seminar participants who helped us shaping the project. †Faculty of Economics, Cambridge University and Division of Humanities & Social Sciences, California Institute of Technology, [email protected] ‡Department of Economics, London School of Economics, [email protected]