Bilateral Communication and Partnership Formation

Abstract:
We consider match formation between two parties, such as marriage, merger or partnership formation. Each party has private information about the value of the match, which creates friction in the matching process. We focus on the role of bilateral communication in this setting and investigate how such communication should be organized in order to improve the matching process. Different communication protocols are considered, and their outcomes are characterized. Our main results indicate that a simple communication protocol which involves one round of communication is sufficient, in the sense that the matching outcome is invariant to length and order of communication. Our analysis also provides a perspective on the role of a neutral mechanism designer or a mediator in this process.