Pre-Matching Gambles

Abstract

This paper investigates pre-matching gambles and provides a new reason to gamble: matching concerns. Examples of pre-matching gambles include occupational choices before the marriage market, college major choices before the labor market, and portfolio management before attracting future clients in the financial market. I show that people make risky investments they would not have made if not for their subsequent participation in a competitive matching market. A fundamental and unique feature of the competitive matching market, which I call the competitive matching effect, induces gambling. The paper also illustrates the relationship between social efficiency and inequality in this setting, and shows how progressive taxation eliminates social inefficiency, reduces inequality, and generates government revenue.