Strategic Disaggregation in Matching Markets

Decisions agents make before and after matching can be strategically linked through the match. We demonstrate this linkage by introducing a game in which universities can force students to commit to majors before matriculating or allow students to pick their majors during their studies. The interaction between “matching forces” (competition for higher quality partners) and “principal-agent forces” (moral hazard and adverse selection) leads to two different equilibria mirroring the admissions systems in the US and England.With monetary transfers, our model provides new insight into athletic scholarships. Price competition removes the surplus from enrolling top student athletes, making it impossible to sustain the US equilibrium with competitive wages. We show that a properly designed transfer cap that places additional restrictions on the way universities can pay their athletes achieves the rst-best welfare outcome, and can lead to a Pareto improvement over the status quo.