Misdirected search effort in a matching market: causes, consequences and a partial solution

Abstract

Using data from an online labor market, I show that buyers inefficiently pursue oversubscribed sellers. Although oversubscribed sellers are positively selected, this fact alone cannot account for the amount of attention they receive. "Excess" buyer attention is caused by an information asymmetry: buyers do not know seller capacities and cannot condition their search efforts accordingly. Sellers---having free disposal on buyer inquiries---have little incentive to disabuse searching buyers. This misdirected search effort is consequential: using an instrumental variables analysis, I show that a recruited seller rejecting a buyer's recruiting inquiry reduces the probability of match formation by as much as 67% points. Motivated by the empirical results, I show how the market-creating platform can optimally allocate buyer attention, given each seller's estimated per-encounter probability of forming a match.