Efficiency in Matching Markets: Application Costs in School Choice
Résumé
We propose a strategic solution to the tradeoff between stability and efficiency in one-sided matching markets. We show that every assignment that Pareto dominates a stable outcome can be implemented in a Nash equilibrium using the deferred acceptance mechanism (DA). To incentivize students, we introduce application costs with a student's payoff lexicographic in the school they attend and the fee they pay. We establish that it is impossible to set identical costs for all students. Finally, we examine student incentives resulting from cost implementation in the Boston and Top Trading Cycle mechanisms showing that costs have no effect.
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