Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2013:27: Assignment Games with Externalities

Jens Gudmundsson () and Helga Habis ()
Additional contact information
Jens Gudmundsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Helga Habis: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We introduce externalities into a two-sided, one-to-one assignment game by letting the values generated by pairs depend on the behavior of the other agents. Extending the notion of blocking to this setup is not straightforward; a pair has to take into account the possible reaction of the residual agents to be able to assess the value it could achieve. We define blocking in a rather general way that allows for many behavioral considerations or beliefs. The main result of the paper is that a stable outcome in an assignment game with externalities always exists if and only if all pairs are pessimistic regarding the others' reaction following a deviation. The relationship of stability and optimality is also discussed, as is the structure of the set of stable outcomes.

Keywords: Two-sided matching; assignment game; externalities; stability

JEL-codes: C71; C78; D62

19 pages, August 27, 2013

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