Performance And Turnover In A Stochastic Partnership
Source: Federal Reserve Bank of Atlanta
This paper characterizes the social-welfare maximizing equilibrium of a "Stochastic partnership matching market", in which players paired to play a stochastic game may quit to be costlessly and anonymously re-matched. Patterns of performance and turnover in this equilibrium are consistent with the well-known "Survivorship bias" and, if partners form "Meaningful first impressions", with the "Honeymoon effect". By contrast, maximizing social welfare in standard repeated games with re-matching typically requires that players receive low payoffs at the start of each relationship. Welfare and turnover comparative statics are also provided: higher partnership-states are associated with higher joint payoffs and, in the special case of an exogenous stochastic process, with higher joint stage-game and joint continuation payoffs as well as longer-lasting relationships.