Premuneration Values and Investments in Matching Markets

Abstract

We analyse a model in which agents make investments and match into pairs to create a surplus. The agents can reallocate their pretransfer ownership claims on the surplus. Mailath et al. () showed that when investments are unobservable, equilibrium investments are generally inefficient. We work here with a more structured and tractable model to analyse investment inefficiencies. We provide conditions under which investment is inefficiently high or low and when changes in the pretransfer ownership claims on the surplus will be Pareto improving, and examine how the degree of heterogeneity on either side of the market affects investment efficiency.