Bester, Helmut (FU Berlin and HU Berlin)
Sákovics, József (University of the Balearic Islands and University of Edinburgh)
We investigate the welfare effect of increasing competition in an anonymous two-sided matching market, where matched pairs play an infinitely repeated Pris- oner’s Dilemma. Higher matching efficiency is usually considered detrimental as it creates stronger incentives for defection. We point out, however, that a reduction in matching frictions also increases welfare because more agents find themselves in a cooperative relationship. We characterize the conditions for which increasing competition increases overall welfare. In particular, this is always the case when the incentives for defection are high.
cooperation; prisoner’s dilemma; competition; welfare; matching; trust building
C72; C73; C78; D6