The Decision To Seek or To Be Sought

Dorothea K Herreiner, Economics Department, Bowdoin College

This paper analyzes the most basic question that arises when market participants must find their trading partners on their own: who searches and who waits to be found. A one-shot market with two sides is considered where everybody can be matched with at most one person and where individuals either search or wait. It is shown that if searching and waiting is done exclusively by one market side, then a market is more efficient if the long market side searches. In a market where on both sides some individuals search and others stay put, there are also hybrid equilibria which are more efficient than one-sided search. These hybrid equilibria are characterized. The matching friction due to uncoordinated search by individuals implies that larger market are in general less efficient than a collection of smaller markets - there are decreasing returns to matching.

Keywords: Matching, Search, Decentralized Markets
JEL Classification: C78, D40, J64

Current Version: November 2002.