Economic Theory Seminar - Sergei Balakin (Monash University)

Title: Application Costs as a Screening Instrument in Decentralized Matching

Abstract: I consider decentralized matching in a two-sided market of firms and workers with application costs and limited budgets. Workers choose whether they should take the risk of applying to a higher-ranked firm (with some probability of rejection) or make a safe choice. I show that application costs set by firms with uncertain capacity may be treated as a screening instrument in order to attract only strong applicants or avoid the competition. Surprisingly, competition may lead to increasing costs: low-ranked firms may even prefer implementing the highest possible costs in equilibrium. I provide economic intuition behind this paradox and find necessary and sufficient conditions that lead to this result.