Decentralized matching markets with endogenous salaries

August 28, 2008

In a Shapley–Shubik assignment problem with a supermodular output matrix, we consider games in which each firm makes a take-it-or-leave-it salary offer to one applicant, and a match is made only when the offer is accepted by her.We consider both one-shot and multistage games. In either game, we show that there can be many equilibrium salary vectors which are higher or lower than the minimum competitive salary vector. If we exclude artificial equilibria, applicants’ equilibrium salary vectors are bounded above by the minimal competitive salary vector, while firms’ equilibrium payoff vectors are bounded below by the payoff vector under the minimum competitive salary vector. This suggests that adopting the minimum competitive salary vector as the equilibrium outcome in decentralized markets does not have a strong justification.

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