Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2018

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The Multiplier Effect in Two-Sided Markets with Bilateral Investments

Deniz Dizdar*, Benny Moldovanu, Nora Szech

Date: 2018-05-13 9:30 am – 10:00 am
Last modified: 2018-04-27

Abstract


Agents in a finite two-sided market make costly investments and are then matched assortatively based on these investments. Besides signaling complementary types, investments also generate benefits for partners. We shed light on quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents' uncertainty about their rank within their own market side and on their uncertainty about the types and investments of potential partners. We study how the strength of the multiplier effect depends on market size and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition for more desirable partners.

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