Tiers in One-Sided Matching Markets: Theory and Experimental Investigation

Abstract

The design of a matching market may affect behavior in prematch stages. In some settings, forward-looking agents might purchase low-priced properties with the intention of trading up. From a design standpoint, such behavior is undesirable. We investigate a tiered structure as a potential solution. Using a model that endogenizes prematch acquisition decisions, we show that tiers promote exchange while protecting the primary market. In the laboratory, we find that both firm revenue and total social surplus are improved by tiered matching, and the amount of improvement depends on the exchange mechanism the firm uses. We focus on two popular mechanisms—deposit first and request first. We find that subjects are less likely to take advantage of the match under tier-free deposit first mechanism, possibly because of risk aversion. Thus, a tiered approach is more critical under the request first mechanism. We confirm that risk aversion partly explains deviations from theory. This paper was accepted by Uri Gneezy, behavioral economics.