Two-Sided Matching with Endogenous Preferences

Abstract

We modify the stable matching problem by allowing agents' preferences to depend on the endogenous actions of agents on the other side of the market. Conventional matching theory results break down in the modified setup. In particular, every game that is induced by a stable matching mechanism (e.g., the Gale-Shapley mechanism) may have equilibria that result in matchings that are not stable with respect to the agents' endogenous preferences. However, when the Gale-Shapley mechanism is slightly modified, every equilibrium of its induced game results in a pairwise stable matching with respect to the endogenous preferences as long as they satisfy a natural reciprocity property. (JEL C78, D82)