On interaction and efficiency : prematch investments with hidden characteristics

• Main Author: Bidner, Christopher
• Format: Others
• Language: English
• Published: University of British Columbia 2009
• Subjects: Premarital investment; Matching; Signaling
• Online Access: http://hdl.handle.net/2429/3911

I develop three models that are designed to aid in the analysis of environments in which agents i) benefit from interacting with others, and ii) optimally choose their characteristics mindful of the fact that such choices will influence the quality of interaction that they can expect. Of central interest is the ways in which a concern for interaction affects the efficiency with which agents choose their characteristics. The first two models contrast with previous work in that each agents' relevant characteristics are both unobserved and endogenously determined. The first model provides an explanation for credentialism in the labour market, and demonstrates how a concern for interaction can lead to over-investment in the relevant characteristic. The second model is motivated by human capital development in the presence of peer effects, and demonstrates how a concern for interaction can exacerbate an inherent under-investment problem. The third model retains the feature of unobserved characteristics, and contrasts with previous work by embedding frictions in the process by which agents compete for partners. The model is set in a labour market and demonstrates that outcomes of interest (equilibrium matching patterns, income, inequality and welfare) are generally not monotonic in the level of frictions. === Arts, Faculty of === Vancouver School of Economics === Graduate