Tractable Model of Dynamic Many-to-Many Matching

Abstract

We develop a tractable, dynamic, and strategic model of many-to-many matching with payoff externalities across links. The joint dynamic surplus or certain second properties of individual utilities, like payoff externalities, can typically be identified. We characterize a class of interior equilibria as solutions to an optimization problem with an objective function that consists of welfare minus an inefficiency loss term. In equilibrium, too few matches are formed. We compare transferable and nontransferable versions of the model; the equilibria of the two versions are equivalent up to a rescaling of parameters. We describe the asymptotic limits of disappearing frictions. (JEL C78, D62, D83, J64)