Efficient Investment and Search in Matching Markets

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We study a two-sided search-and-matching model in which agents invest before entry. In every period, agents incur an additive search cost, pairs meet at random and bargain over prices. Inefficiencies can be caused by a potential hold-up problem and mismatches between skills. We make three major points. First, despite the potential inefficiencies, a second welfare theorem holds: the constrained efficient allocation is an equilibrium. Second, we establish a general assortativity result, provide conditions for uniqueness, and characterize the outcomes in symmetric two-skill economies. Third, we show that the efficient outcome can be discriminatory in the marriage market.