A Theory of Targeted Search

By Paulina Restrepo-Echavarria, Antonella Tutino and Anton Cheremukhin

http://d.repec.org/n?u=RePEc:red:sed013:664&r=dge

We develop a model of matching where participants have finite information processing capacity. The equilibrium of our model covers the middle ground between the equilibria of random matching and the directed search literatures and reproduces them as limiting cases. Our theory of targeted search generates a unique equilibrium which is generally inefficient.

This is an interesting paper that embeds rational inattention, or limited information processing, into the bilateral search literature. To my surprise, this yields a unique equilibrium, which is important as it makes it possible to use this kind of modelling in many applications. The paper also highlights an inefficiency stemming from the lack of information. which also helps in getting the uniqueness. In optimal assignment models there is multiplicity because of the infinitely strong complementarity between two players: the targeted player has every incentive to reciprocate. Here the complementarity is not that strong due to the information constraint, which makes that only one pairing can happen.