He, Yinghua and Yan, Jianye (2012) Competitive Equilibrium from Equal Incomes for Two-Sided Matching. TSE Working Paper, n. 12-344, Toulouse

Preview

Text Download (445kB) | Preview

Abstract

Competitive Equilibrium from Equal Incomes for Two-Sided Matching
Using the assignment of students to schools as our leading example, we study many-to-one
two-sided matching markets without transfers. Students are endowed with cardinal preferences
and schools with ordinal ones, while preferences of both sides need not be strict. Using the
idea of a competitive equilibrium from equal incomes (CEEI, Hylland and Zeckhauser (1979)),
we propose a new mechanism, the Generalized CEEI, in which students face different prices
depending on how schools rank them. It always produces fair (justified-envy-free) and ex ante
e¢ cient random assignments and stable deterministic assignments if both students and schools
are truth-telling. We show that each student's incentive to misreport vanishes when the market
becomes large, given all others are truthful. The mechanism is particularly relevant to school
choice as schools' priority orderings over students are usually known and can be considered
as their ordinal preferences. More importantly, in settings like school choice where agents have
similar ordinal preferences, the mechanismis explicit use of cardinal preferences may significantly
improve eficiency. We also discuss its application in school choice with group-specific quotas
and in one-sided matching.