Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2017

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Investment and Matching with Cheap Talk and Incomplete Information

Seungjin Han*

Last modified: 2017-04-18

Abstract


This paper studies two-sided investment followed by stable matching in large economies with incomplete information on both sides in a transferrable utility framework. In contrast to complete information, investments are sensitive to how match surplus is split in equilibrium. If agents on one side are residual claimants, they do not engage in investment competition for pure signaling because they can fully reveal their true type through costless cheap talk at the matching stage. If investments by residual claimants are productive, then they are constrained efficient without cheap talk. Our comparative statics provide new insights into inequality, efficiency and bargaining power.