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This paper investigates the causes and welfare consequences of unraveling in two-sided matching markets. It shows that similarity of preferences is an important factor driving unraveling. In particular, it shows that under the ex-post stable mechanism (the mechanism that the literature focuses on), unraveling is more likely to occur when participants have more similar preferences. It also shows that any Pareto-optimal mechanism must prevent unraveling, and that the ex-post stable mechanism is Pareto-optimal if and only if it prevents unraveling.
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