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Signal Uncertainty and Unraveling in Matching


Zhenyu Lai

December 9, 2009

Market-specific differences exist in how sequential signals reveal
worker quality. This paper models how noisy signals of worker quality
can lead to unraveling in the early timing of offers made in two-sided
matching markets. Results suggest that firms have a strategic incentive
to make early offers in markets with: 1) little differentiation in signals
of worker quality between early and late stages, 2) poor pre-hiring
signals for post-matching worker quality, 3) top-ranked workers having
disproportionate weighting in worker quality, and 4) reduced early-
stage signal uncertainty due to private signaling.

1 Introduction
Hiring the best candidate for a job can be described as an art, or at best an
imperfect science. During the recruiting timeline, information about worker
quality becomes available at different timings. For instance, firms may infer
worker quality very early on from their current school. Yet, final test scores
may only become available later. In some markets where firms may plan
to make early offers, it is frequently observed that the details of this public
signaling process and the level of noise in the corresponding worker quality
signals received are often deeply involved in the firm’s strategic decision. 1

Special thanks to Al Roth, Peter Coles, Jacob Lesno, and participants of the Fall
2009 Market Design course at Harvard University for comments and discussions. Any
comments or suggestions are welcome and may be emailed to
For example, in a survey of the market for judicial law clerks, Avery et al. (2001)
identify the tradeoff that early offers preclude the opportunity for judges to receive a
predictive signal on the quality of the student’s legal writing via her second and third-
year course grades.

Perhaps more vexing is the fact that even the best signals provide only
noisy estimates of worker quality with limited predictive power. Hiring is
an imperfect process. While there are many ways to gather information
on your candidate (e.g. through resumes, transcripts, interviews), firms
can never determine a candidate’s quality with certainty until the person
actually starts work. Such ambiguity might compromise the stability of
a final matching and lead to a strategic incentive to hire based on early
information rather than to wait for an improved signal.
This paper developes a tractable model that we can use to engage the
phenomenon of unraveling in the timing of firms’ hiring decisions. Firms
have an incentive to hire workers early depending on the tradeoff between the
strategic gains from making an early offer and the marginal information costs
from acting on an early signal over a better, late signal of worker quality.
Roth and Xing (1994) argue that unraveling is unlikely if the uncertainty
associated with hiring early is large compared with the possible benefits.
Rather than to focus on the uncertainties faced by different firms in payoffs
over individual workers, the primary contribution of this paper is to consider
what uncertainties are specific to individual markets regarding the signaling
and accumulation of information on worker quality. Frictions exist in the
real world and different markets face different levels of frictions with different
implications for market design. In questioning why firms make early offers,
this paper mainly tries to understand what incentives are appropriate for
each market that would make firms more agreeable towards undergoing a
later match.
Much of existing matching literature focuses on situations when prefer-
ences are completely known ex-post. Under complete information, a well-
functioning market should achieve ex-post stability and preclude unraveling
2 . Yet, we continue to observe that unraveling occurs in some markets but

not in others 3 . Roth and Xing (1994) show that the instability of late
matches is neither a necessary nor sufficient condition for unraveling. While
unraveling leads to substaintial efficiency loss, it remains an open research
question and topic of extensive discussion as to what factors systematically
differentiate these markets. This paper approaches the issue of unraveling by
investigating for systematic market-specific differences that would be likely
causes for this phenomenon. In real-markets, we often observe that market
failure can result from firms never possessing sufficient information over the
See Roth and Xing (1994) for an extensive description of market unraveling. Kagel
and Roth (2000) describes a related laboratory experiment.
Such as the U.S. gastroenterology market (Niederle and Roth, 2003), the market for
clinical psychologists (Roth and Xing, 1997) and other examples in Roth and Xing (1994).

complete set of worker qualities even at the point of the match when the
maximal ex-post information is known. If matching proceeds according to
pre-match preferences that are never completely specified, firms have to al-
ways at least consider the welfare trade-offs involved in making an ex-ante
inefficient early offer.
Another common strand in the literature angles in on this question
from the perspective of the agent’s motivations. Li and Rosen (1998); Suen
(2000); Li and Suen (2000, 2004) attributes the unraveling phenomenon to
the agent’s desire to insure against being left in the long side of the market,
while in Damiano, Li, and Suen (2005), early contracting arises because de-
layed search is costly to agents. Perhaps most closely related to this paper in
investigating for systematic market motivations for unraveling is the model
presented in Halaburda (2008), where the model posits that markets contain-
ing firms with correlated preferences are more likely to unravel. Likewise,
the results in this paper states that the lack of differentiating information
structure across time lowers the cost of making an early offer. This result
is compatible with Niederle and Roth (2009) which states that the market’s
willingness to accept exploding offers is what leads to inefficient early con-
tracting 4 . All settings of the model in this paper also utilize the intuition
in Niederle et al. (2009) where early offers arise when workers perceived to
be of high quality are scarce relative to the deep pool of job-seekers.
This paper models a two stage, two-sided marriage market between firms
and workers with identical preferences. A utility is associated with being
matched with each agent. However, while the utility from matching with
each firm is common knowledge, worker quality is private information and
each firm chooses to participate either in an early or late match. In each
stage, a stage-specific probability reveals each worker’s quality to match-
participating firms. The model in this paper investigates the relationship
between these stage probabilities as market-specific exogenous variables and
the firm’s propensity to make an early offer.
Results suggest that markets in which firms make progressively earlier
offers to workers would systematically exhibit the following characteristics.
Firstly, markets susceptible to unraveling would observe pre-hiring signals of
worker quality that convey very little incremental information to firms over
time. Also, pre-hiring signals of worker quality would be in general poor
predictors for post-matching worker quality. In markets where this were
true, the incentive for firms to wait for additional candidate information to
See Roth and Xing (1997) for other examples of how early offers can lead to unraveling
in markets.

be revealed would be small and the information costs of making an early offer
would be reduced. This largely matches empirical evidence whereby markets
such as the economic PhD job market never faces the threat of unraveling.
Hiring institutions always wait for the candidate’s job market paper to be
revealed before making the hiring offer as this late signal is often not only
a good predictor of candidate quality, but also a much better predictor of
candidate quality compared with merely having an interview or transcript.
Conversely, Avery et al. (2007) describe the market for federal judical law
clerks to be one where limits to the predictive power of pre-sorting signals
of worker quality exist due to the highly personal nature of the clerkship
relationship. We observe that this market frequently unravels.
Model results also suggest that unraveling would be more likely to oc-
cur in markets where desirable talent is aggregated among a limited pool
of select, top candidates. Again, using the example of the market for law
clerks, many judges believe that hiring a top clerk has a significant effect
on their productivity and thus the functioning of the federal court system
(Avery et al., 2007) and often make early offers to entice such candidates.
Finally, results suggest that markets which heavily involve private signal-
ing during the early-stage process are more likely to unravel. This relates
to Fainmesser (2009) which incorporates how well-connected firms are to
private information about workers’ productivity in a model of early hiring.
Section 2 sets up the game. Section 3 starts by comparing the best
achievable match equilibrium with a first-best matching outcome in which we
have the best firm match with the best worker, the second-best firm match
with the second-best worker and so on, in accordance with their identical
preference rankings. Section 4 computes the equilibrium conditions and
comparative statics for stable and unraveling equilibria. Section 5 concludes
with a discussion of results and market design issues.

2 Model
Construct a two-stage game between two agent types: firms and workers.
Ex-ante, firms choose to match either in stage 1 or 2. In each stage i, the
market reveals each worker k’s quality vk to match-participating firms with
a stage-specific probability γi . With probability 1 − γi , match-participating
firms are unable to observe the worker payoff and assume it to be a minimal
value v. After the stage 1 match, workers with allocated offers can choose
either to accept or reject. Firms and workers who choose to contract then
leave the market immediately. In Stage 2, the remaining agents are matched.

Definition 1 (Offer Game). Define the two-stage offer game which matches
worker w to firm f as Γ =< F, W, ∆, γ, u, v, πf , Uw >, consisting of:
• F firms indexed by f ∈ {1, . . . , F } and W workers indexed by w ∈
{1, . . . , W } with W > F .

• a finite set of actions ∆ = {1, 2} indexed by δ and Ω for firms and

workers respectively where δf = i denotes firm f ’s action to undergo
matching in stage i and Ωw = i denotes worker w’s action to undergo
matching in stage i.

• a stage probability γi ∈ [0, 1] indexed by η i where ηw

i = 1 with proba-

bility γi for worker w who is still in the market in stage i. Otherwise,

i = 0, representing that the worker w in stage i is either not “re-
vealed” or not in the market.

• a firm payoff function πf : δ × η i × Ω 7→ v, such that v ≡ v 0 ∪ v. v 0 is

the vector of firm payoffs v 0 ≡ [v1 , v2 , . . . , vW ] where v1 > v2 > . . . >
vW > 0 represents worker 1 as the most prefered worker to be hired.
vk thus denotes the quality of worker k. v is the unrevealed worker
payoff such that vW > v > 0.

• a worker utility function Uf : η i × Ω × δ 7→ u, such that u is the vector

of worker utilities u ≡ [u1 , u2 , . . . , uF ] where u1 > u2 > . . . > uF > 0
represents firm 1 as the most prefered firm to be hired by. uj thus
denotes the utility that workers get from being matched to firm j.
Note that agents are given homogeneous preferences and have von Neumann-
Morgenstern utility functions over lotteries when matching with the opposite
side of the market. Because utility vectors are sorted in descending order,
the indices denote the agent’s ordinal rankings. To add more structure, we
fit these cardinal utility vectors to let vk+1 = αvk and uj+1 = βuj where
the parameters α, β ∈ (0, 1) are used as a measure of convexity for the re-
spective worker and firm utility functions. In general, we assume that the
magnitude of these parameters are small so that the utilities u and v are
convex and decreasing with its index. This property reflects that matching
with higher-ranked agents on both sides of the market leads to increasing
returns 5 . Also, without loss of generality, we will consider only large labor
markets, where the number of workers approach infinity. Each firm seeks to
hire exactly one worker, and each worker seeks to be hired by exactly one
firm. Denote the set of firms as F and the set of workers as W.
This same assumption is used in Niederle, Roth, and Unver (2009)

Ex-ante, firms observe each worker’s quality to be the firm’s payoff from
the worker with probability γi in each stage i. If worker’s quality is observed,
she is defined to be revealed. With probability 1 − γi , the market does
not reveal the worker’s quality in stage i and firms observe the unrevealed
worker’s quality to be v. Assume vW > v > 0, which represents that firms
would still prefer to hire an unrevealed worker over not hiring any worker.
Intuitively, we can think of a worker as having some positive probability γi
to being “revealed” in each stage i and being placed on a firm’s shortlist of
candidates. Firms thus always prefer shortlisted (or “revealed”) candidates
and have no distinct preferences between non-shortlisted candidates. Let
γ1 , γ2 ∈ (0, 1) with γ2 > γ1 . Specifically, we let γ2 = γ1 + θ where θ > 0.
Let γ ≡ [γ1 , γ2 ].
Consider the intuition involved in this construction. Suppose that a
type of information that would be available on worker quality in Stage 1
is the university that the worker attends. In Stage 2, firms might also
have available the worker’s cumulative GPA from her final semester. In
Stage 1, the market might only be able to reveal worker quality to match-
participating firms with probability γ1 . With the additional information
available in Stage 2, the market would be able to reveal worker quality with
a higher probability γ2 . These values of γi are specific to individual markets.
In a market where firms primarily consider the degree-awarding institution
as the most important representative signal for worker quality, we would set
the difference θ = γ2 − γ1 to be small. Conversely, if firms find good grades
to be a reliable predictor for job success, we would expect θ to be large.
Finally, if we were in an industry where all pre-hiring information available
were considered to be a poor predictor for the worker’s job performance, we
would expect both γ1 and γ2 to be small. 6
At each stage, match-participating firms and revealed workers conducts
a matching using an algorithm based on the agents’ ordinal rankings. 7 .
This matching can be described as follows: Firms propose offers to workers.
Because rankings are identical across workers and firms, the highest-ranked
firm is matched to the highest-ranked worker. Then, the next highest-ranked
firm is matched to the highest-ranked available worker. This continues until
all the firms are matched 8 .
Table 1 details more examples from a number of selected markets.
Also known as the “firm-proposing” algorithm in Gale and Shapley (1962). A well-
established result in literature states that a unique stable matching exists when workers’
preferences are identical. See e.g. Roth and Sotomayor (1990).
It is also easy to see that this match is incentive compatible, i.e. no agent benefits
from misreporting his preferences.

Firms prefer to hire the worst worker rather than to keep a vacancy at
the end of the game and have identical preferences over workers. Each firm
f maximizes expected payoff and plays the strategy σf : uf 7→ ∆ which
maps the firm’s type uf to its chosen action. Similarly, each worker w
maximizes expected utility and plays the strategy σw : vw 7→ ∆ which maps
the worker’s type vw to its chosen action. Let the vector σ describe the
strategy profile for all agents.

Definition 2 (Rational Agents). In an equilibrium strategy profile σ with

rational agents,

1. every firm f ∈ F chooses σf∗ to maximize its expected payoff.

σf∗ ∈ arg max Eπf (σf |uf , σ−f , γ) ∀∆ ∈ {0, 1} , ∀uf ∈ u

∗ to maximize her expected payoff.

2. every worker w ∈ W chooses σw

σw ∈ arg max EUw (σw |vw , σ−w , γ) ∀∆ ∈ {0, 1} , ∀vw ∈ v 0

The market can now be fully characterized. Figure 1 illustrates the flow
of the game.

Figure 1: Timeline of Game

3 First Best Vs Late Matching Outcome
Let us now pause to first consider the match equilibrium M, which we
define as the pooling equilibrium where all firms choose to match in Stage
2 irregardless of type. In a first-best outcome, firm i would be matched to
the corresponding worker i for i = 1, 2, . . . , F . This requires that the top
F workers be “revealed” in Stage 2. However, frictions are present in real
markets. The model reflects this by letting this first-best outcome occur
only with probability (γ2 )F . Intuitively, we observe market frictions in real
life when the employee who provides firms with the best value may not be
shortlisted for offers because she did not possess the most excellent paper
credentials or give the best interview.
Thus, we observe that the match equilibrium M might not be ex-post
stable9 . We define ex-post stability as when there is no firm-worker pair
that would prefer to be matched to each other rather than to remain in its
existing pairing when all workers are revealed. Only a first-best equilibrium
outcome would achieve ex-post stability.
Lemma 1 (Ex-Post Stability). When γ2 < 1, the match equilibrium M
when all firms choose to match in Stage 2 is not always ex-post stable.
Proof. See Appendix A.1

To further illustrate the welfare difference for firms between M and our
first-best case, we know that under the match equilibrium M,

1 k−1 j
P (firm j hires worker k) = + γ (1 − γ2 )k−j ∀k ≥ j
W k−j 2
The first and second terms are the respective probabilities of hiring an
unrevealed and revealed worker k. Letting vk = αk−1 v1 , Firm j perceives
its ex-ante expected payoffs under M to be:
X k−1 j
πjM W
= (1 − γ2 ) v + γ (1 − γ2 )k−j αk−1 v1
k−j 2

We thus show the following lemma:

Lemma 2 (Welfare Gains). Under match equilibrium M, the firms’ expected
payoff is increasing with γ2 .
Bulow and Levin (2006) argues that an ex-post stable outcome maximizes social wel-

Proof. See Appendix A.2

This proof illustrates 2 effects. Primarily, firms gain in expected pay-

offs from the direct effect of matching with a higher-ranked worker who is
now more likely to be revealed. More subtly, as the probability that each
worker is revealed increases, a lower-ranked firm benefits from the reduced
competition with other higher-ranked firms. With an increased probability
of each worker being revealed, these higher-ranked firms are now more likely
to match with other higher-ranked workers. Directly, this intuition leads to
how lower-ranked firms benefit more from increases in γ2 : Because workers
have an identical ranking over firms, the less-preferred firms are basically
always waiting for the top firms to take their pick first before choosing from
the remaining unhired workers. For lower-ranked firms, the benefits of an in-
crease in γ2 would thus be applicable across a “larger pool” of lower-ranked
workers, than for higher-ranked firms who already match with their best
“achievable” worker.
Simulating the model, figure 2 reflects these results by showing that the
distance between curves with different γ values is increasing for lower-ranked

Figure 2: Simulated matches across across different values of γ

Let early equilibrium E be the pooling equilibrium where all firms

choose to match in Stage 1 irregardless of their type.

Corollary 1 (Early vs Late match equilibrium). Expected payoff for firms

is higher in match under M than in match under E.

Corollary 2 (FB Welfare). Difference in overall welfare of firms between

match under M and first-best outcome is decreasing as γ → 1.

The first corollary follows directly from Lemma 2 since we can consider
both equilibriums under M and E to be identical except that γ1 < γ2 .
Similarly, the second corollary follows directly.
We also observe that expected payoffs increase faster with γ2 when the
vector of worker qualities are more convex, i.e. when the parameter α is
small. These increasing returns to worker quality may be observed when
the hiring market places a premium on matching with “superstar” workers.
Rosen (1981) defines a superstar system as one where a relatively small
number of people capture a skewed distribution of income and ability. In
a superstar market, firms in this model perceive a higher cost each time
a successive quality worker is unrevealed. An increase in the probability
of revealing a worker (increase in γ2 ) would thus lead to a larger gain in
expected payoffs.
Lemma 2 illustrates the importance of allowing aftermarket calibration
in matching markets over which firms are only able to observe noisy pre-
hiring signals of worker quality. When worker qualities are unable to be fully
specified before the worker actually starts work, markets can only achieve a
first-best outcome by supreme coincidence. This model suggests that firms
would be able to achieve an outcome that more closely approximates first-
best if aftermarket re-matching is allowed 10 during later stages with larger
γ2 and if firms are allowed to break pre-existing matching contracts 11 .

4 Stable and Unraveling Equilibria

To proceed, we now solve the conditions under which match equilibrium M
is stable. For simplicity of analysis, this section assumes that W >> F and
that W → ∞. Notice that if firms are willing to make an early offer when
the worker market is large, they would be even more willing to do so when
workers are scarce.
Roth and Xing (1994) hypothesize that the provision for universities to re-enter the
market and hire at the full-professor level might preclude unraveling in academic markets
Niederle and Roth (2009) discuss that binding acceptances are potent facilitators of
inefficiently early matching.

For worker w to accept an early offer, the intuition follows that the fixed
payoff from accepting the offer under E has to be higher than the expected
payoff under M. Because workers’ expected payoffs are monotonically de-
creasing with their indices under M, it is straightforward to see that if
worker w0 is willing to accept an early offer from firm f , then any worker
w00 , where w00 > w0 , would also be willing to accept an early offer from firm
We can thus show the following lemma and use it to prove Proposition
Lemma 3 (Threshold Worker). For each firm f , there exists a threshold
worker wf ∗ such that any worker w0 , where w0 ≥ wf ∗ , will accept an early
offer from firm f .
Proof. See Appendix A.3

Proposition 1 (No-Unraveling Equilibrium). At the equilibrium where all

firms participate in matching M, firm j has no incentive to deviate and
make an early offer if

αj γ2j (1 − γ2 ) γ1
> (1)
1 − α + αγ2 1 − α + αγ1
Proof. See Appendix A.4

Proposition 1 gives us the equilibrium condition needed to sustain the

“no unraveling” matching equilibrium in the model. Taking comparative
statics, the next proposition further breaks down the key components that
motivate unraveling in the model.
Proposition 2 (Drivers of Unraveling). At the “no unraveling” match equi-
librium M where all firms choose to match in Stage 2, firm j is less likely
to deviate and make a Stage 1 offer if:

1. Information on worker quality is more differentiated between early and

late stages (θ = γ2 − γ1 is large)

2. Stage 1 information on worker quality is less reliable. (γ1 is small)

3. Stage 2 information on worker quality is less noisy. (γ2 is large)

4. Firm is of higher rank (j is small)

Proof. See Appendix A.5

To illustrate these comparative statics, I simulate the potential number
of ranks that workers expect to gain if they deviate from match equilibrium
M and initiate early matching in Stage 1. In figure 2, I fix the Stage 2
probability as γ2 = 0.75 and simulate gains for the different ranked firms.
Without utilizing any restrictions on the vectors of firm and worker cardinal
utilities u and v, the graphs illustrate respective results for the lower and
upper bound threshold workers in Lemma 3. Notice that in the lower bound
case, wj∗ = 1 because W >> F and at the limit, all workers would be willing
to accept an offer from any firm j in Stage 1 due to the threat of remaining
unemployed. Conversely, in the upper bound case, wj∗ = j because worker
j cannot expect to be hired by a firm better than firm j in Stage 2 and thus
would definitely accept an offer by firm j in Stage 1. The graphs illustrate
that as θ increases, firms’ expected payoffs from deviating and making an
early offer become smaller as they would expect to be improving the rank
of their matched worker by less.

Figure 3: Firms’ simulated gains by deviating from M

Firms’ specific cardinal payoffs over each individual worker represent an-
other input that factors strongly into the model. Thus far, this model has
remained agnostic about the market-specific distributions of firm payoffs
over workers. Now, by enforcing our utility form vk+1 = αvk , we seek to
obtain some intuition on a crude measure of how convexity/concavity over
payoffs affect the likelihood of unraveling and postulate the hypothesis that
firms in “superstar” markets with a more convex set of payoffs (smaller α)

would face greater incentives to make early offers. As an example of a “su-
perstar” market, Hausman and Leonard (1997) demonstrate that television
ratings (and hence advertising revenues) in National Basketball Association
games are disproportionately higher when certain “superstars” are involved.
Sports teams frequently scout young players for the next big superstar and
competition is fierce in vying for their services (Groothuis et al., 2007). An-
other example of a market in which the hiring process is dominated by the
search for superstars is the market for law clerks 12 .
The intuition for the next proposition proceeds as follows: Suppose that
the top-ranked worker in the market provides firms with a disproportionately
large payoff compared with the rest of the workers and that this worker
would be willing to accept early offers from an acceptance set of firms.
We can directly see that firms in the top worker’s acceptance set would face
a greater incentive to make an early offer in order to obtain even a small
probability of capturing this top worker.
Proposition 3 (Convexity of Payoffs). At the “no unraveling” match equi-
librium M where all firms choose to match in Stage 2, firm j is less likely
to deviate and make a Stage 1 offer if the distribution of firm payoffs v is
less convex (α is large) and if firm j satisfies the condition such that:
(1 − α) + αγ1
Proof. See Appendix A.6

Finally, unraveling in the timing of early offers is characterized by a

“snowballing” effect. While inefficient, the phenomenon that some agents
contract early would be manageable if it were indeed just restricted to a
small subset of offending firms. However, the problem always lies in that
when the first deviating firms start to move early, this eventually forces
other previously non-deviating firms to make early offers too (Roth and
Wald (1990) describes the “superstar” nature of the market for law clerks: “But why
the fervent competition for a handful of young men and women when our law schools spawn
hundreds of fine young lawyers every year? Very simply, many judges are not looking just
for qualified clerks; they yearn for neophytes who can write like Learned Hand, hold their
own in a discussion with great scholars, possess a preternatural maturity in judgment and
instinct, are ferrets in research, will consistently outperform their peers in other chambers
and who all the while will maintain a respectful, stoic, and cheerful demeanor.... Thus, in
any year, out of the 400 clerk applications a judge may receive, a few dozen will become
the focus of the competition; these few will be aggressively courted by judges from coast
to coast. Early identification of these ‘precious few’ is sought and received from old-time
friends in the law schools – usually before the interview season even begins.”

Xing, 1994). To sketch the following proof, I first show that the equilibrium
payoffs for the remaining firms to match in Stage 2 are lower for when a
single firm matches early compared to when no firms deviate from the Stage
2 match. By induction, the equilibrium payoffs for firms to remain in the
Stage 2 match is always decreasing as more firms deviate and match in Stage

Proposition 4 (Snowball Effect). Let N be the number of firms who choose

to match in Stage 1. As N gets large, the remaining firms who chose to
match in Stage 2 will face increasingly stronger incentives to match in Stage

Proof. See Appendix A.7

4.1 Private Signaling

Private signaling often facilitates unraveling in markets. In markets with
a high incidence of private signaling, firms either receive signals of worker
quality in advance or receive additional signals that are not publically ob-
servable, or both. Matching in some markets operate completely based on a
firm’s network of private signals. When private signals (e.g. from personal
recommenders) distort the information flow structure in the market, firms’
incentives towards waiting for incremental information gains change. In the
market for law clerks, Kozinski (1991) writes:

At some schools, the placement office insists on collecting the

letters of recommendation so that all may be sent at a ’proper
date.’ Streetwise students avoid this pitfall by asking their rec-
ommenders to send letters directly to the judges.

A simple way to extend the model to incorporate private signaling would

be to allow for firms to be divided into 2 groups, those who receive private
signals and those who don’t, and to imbue each group with a specific value
of γ1 . Directly, we see that if a firm were to privately receive a Stage 2 signal
in Stage 1 (i.e. γ1 = γ2 ), for example through an earlier private recommen-
dation as above, there would be no incentive for the firm to wait. Instead,
this firm would match in Stage 1. From Proposition 4, this would lead to
a snowballing effect in firms which make early offers. Any heterogeneity
in private signaling which reduces the information uncertainty between the
early and late stages such that a firm is now willing to make an early offer
would thus lead to the increased incidence of unraveling.

5 Discussion
To explain unraveling, this paper has focused on the firm’s incentives to
make an early offer as a tradeoff with respect to the incremental information
gains from waiting. We observe that many pre-existing markets seem to be
structured in a manner that reflects variations of this intuition.

1. Academic Specialization
Malamud (2009) describes a natural experiment involving the arguably
exogenous education systems of Scotland and England which have oth-
erwise similar macroeconomic policies decided by a common UK gov-
ernment. In England, students specialize and choose their majors early
before going to college. In Scotland, students choose their majors late
in their college careers, after additional information regarding their
personal interests have been revealed.
Results establish that Scottish students are less likely to switch to an
unrelated occupation than their counterparts in England.
In this market, students do not favor unraveling and deciding on their
career specializations early due to the large incremental information
gains from having more time to discover their personal interests.

2. Marriage
Bergstrom and Bagnoli (1993) model a marriage market in which the
level of desirability of a male mate only becomes known over time. In
equilibrium, high quality males marry later than low quality males.
In this market, low quality males have smaller incremental information
gains from waiting and are thus more likely to make early offers and
favor unraveling in the market. 13

Table 1 lists a selection of markets that have been studied in the litera-
ture on unraveling and relates them to the intuition in this paper’s frame-
work. A better understanding of each market’s specific information process
structure would enable market planners to better circumvate the problem
of unraveling.
Interestingly, it is an equilibrium in Bergstrom and Bagnoli (1993) for older males to
match with younger females. There is no incremental information gain over time with
respect to the level of desirability of female mates and so females always have incentive to
marry early.

Market Early Signal Late Signal γ1 γ2 θ α Remarks
College admissions SAT scores, Cumulative Spring transcripts large large very small Admissions decisions usually
fall transcripts small rely on information submitted
by end of fall.
Federal court clerkships 1st year grades 2nd year grades, legal large small small very Strong competition for top stu-
writing sample small dents and ivy league graduates.
Japanese university grad- Private recommenda- Final course grades large large very small Large weight on early private
uates tions small recommendations.
Medical interns and resi- 1st 2 year course grades Final course grades small small large large Rural and suburban hospitals
dents struggle to interview candi-

Medical subspecialties Prior course grades Graduate course grades large large small small Thin markets which are highly
Postseason college foot- Results of early matches Results of late matches very very very small College football results are gen-
ball bowls small small large erally unpredictable.

Table 1: Information Structure in a Selection of Markets a

Sources: Roth (1984); Wald (1990); Roth and Xing (1994, 1997); Niederle and Roth (2003); Niederle et al. (2009); Frechette et al.
5.1 Application: Market for Federal Judical Law Clerks
Surveys by Avery et al. (2001, 2007) poignantly describe how the market
for law clerks constantly unravels. In our framework, we would describe this
market to have the following characteristics:

1. High γ1 - Rigorous entrance criteria at top law schools are a good early
proxy of worker quality.

2. Low γ2 - Personal working relationship is an important factor of worker

quality and can only be established after employment.

3. Low α - Top candidates are highly sought after by judges.

To circumvent the threat of unraveling, the implications from our model

would suggest the following recommendations:

1. Make γ2 larger - Improve on legal writing sample and second year in-
ternship requirements to form a better late predictor of worker quality
rather than early interviews and private recommendations.

2. Make θ larger - Law schools should develop a more specialized syllabus

that leads to greater differentiation of student quality, such as allowing
final year students to participate in advanced honors seminars. Judges
who wait to participate in late matching would be able to observe an
additional layer of information.

3. Make α larger - Improve and lengthen mentoring / on the job training

for new hires so as to allow lower ranked clerks to more easily catch
up with their higher ranked peers.

4. Allow for aftermarket matching - Entry-level contracts should be made

more flexible. For example, we could implement a “trial-period” when
judges can look to hire a replacement law clerk and law clerks can
choose to work for another judge even after the match is made. Both
judges and law clerks would benefit from having the additional knowl-
edge while testing out the working relationship.

5.2 Market Design

In the spirit of Roth and Xing (1994) which states that “unraveling may be
impeded if the uncertainty associated with hiring early is large compared
with the possible benefits”, this paper is motivated by an interest from the

market planner’s perspective of how we might structure the information
process such that agents would have incentives to wait to match later.
Thus far, the most common and successful implementations of market
design to correct unraveling are movements by markets towards a centralized
clearing house 14 . Yet, we continue to see that central matching mechanisms
work in some situations but not in others 15 . Furthermore, it is not practical
to expect that a centralized solution is always feasible and the reality is that
a majority of markets are likely to remain decentralized. From a market
planning perspective, the most plausible alternatives to reduce instances of
market failure in a decentralized market is to tweak the rules and institutions
of the game. These rules convey a rich source of observable information
about market-specific structures. This paper has focused on one of the
most important market processes, which is how information is revealed to
agents in the market. Roth and Xing (1994) conclude by stating that for
many markets, the difficulties associated with coordinating the timing of
transactions have been decisive in determining how the markets have come
to be organized. By changing rules to tweak the information process, this
paper argues that we can align agents’ incentives towards behavior and
endogenously influence other factors in the market that might factor into
unraveling, such as exploding offers and binding acceptances (Niederle and
Roth, 2009).
Ideally, further extensions would involve either observing a natural ex-
periment or conducting a laboratory experiment so as to match data into
the model. In dealing with unraveling, market design would call for an en-
gineering approach 16 that deals with the complicating details involved in
each market’s specific information process structure (see Table 1).

A Appendix of Proofs
A.1 Proof of Lemma 1
Proof. Suppose γ2 < 1. Let w0 ∈ [1, 2, . . . , F ]. With positive probability
(1−γ2 ), the worker w0 ’s quality will be unrevealed. Hence, there is a positive
probability that firm f 0 will not be matched with worker w0 where f 0 = w0 .
Because an ex-post stable equilibrium requires each firm f ∈ [1, . . . , F ]
to be matched with each corresponding worker w ∈ [1, . . . , F ] where f = w,
equilibrium is not always ex-post stable.
For example, the National Resident Matching Program (NRMP)
Such as the Medical Specialties Matching Program (MSMP) for Gastroenterology
See Roth (2002)

A.2 Proof of Lemma 2
Proof. Under M, the firm j views its ex-ante expected payoff as:
X k−1 j
πjM = v(1 − γ2 ) W
+ γ (1 − γ2 )k−j vk
k−j 2

Assume W is large such that the probability of matching with an unre-

vealed worker is neglible. Relabeling the indices in the sum and substituting
in vk = αj−1 v1 , we have:
W −j  
X k+j−1 j
πjM = γ2 (1 − γ2 )k αk+j−1 v1

Taking first order condition with respect to γ2 :

W −j
∂πjM j−1
X (k + j − 1)(k + j − 2) . . . (j + 1)(j) k
= (αγ2 ) v1 α (1−γ2 )k−1 [j − (j + k)γ2 ]
∂γ2 k!

∂π M j
Notice that ∂γj2 > 0 for each individual term of the sum when γ2 < j+k .
When k = 0, γ2 < 1 and this always holds.
∂π M
For small γ2 , we can directly see that ∂γj2 > 0.
For large γ2 , the k-th term in the sum is decreasing in order of magnitude
with the factor (1 − γ2 ) and is thus always dominated by the preceeding
terms. This effect is further compounded when j is large (for lower-ranked
firms) and when α is small (vector of worker qualities is very convex). Hence,
πjM is always increasing in γ2 .

A.3 Proof of Lemma 3

Proof. Consider worker k’s maximum utility from rejecting an early offer
and minimum utility from accepting an early offer. For worker k to accept
an early offer, the following inequality must hold:
min{k,F }  
X k−1 j v
uF > γ2 (1 − γ2 )k−j uj +
k−j W

For F firms, W → ∞ and uj+1 = βuj , this simplifies to:

min{k,F }  
X k−1 j
uF > γ (1 − γ2 )k−j β j−F uF
k−j 2

min(k,F )  
X k − 1 −F αγ2 j
1> β ( ) (1 − γ2 )k
k−j 1 − γ2

As k gets large, the expression on the right hand side of the equation
decreases in magnitude. Since we assume W >> F , there must exist some
worker k, where k is sufficiently large, such that this inequality must hold
for each firm f . Hence, any worker k 0 where k 0 ≥ k will also accept an early
offer from firm f .

A.4 Proof of Proposition 1

At the equilibrium under matching M, recall that firm j’s expected payoffs
X k−1 j
πjM = v(1 − γ2 ) W
+ γ (1 − γ2 )k−j vk
k−j 2

From Lemma 3, we know that if firm j deviates and makes an early

offer, there exists a threshold worker wj∗ and a corresponding set of workers
W 0 ∈ wj∗ , wj∗ + 1, . . . , W that would accept an early offer from firm j.
Hence, firm j’s deviation payoffs are:
k−wj∗ 1
πjD = γ1 (1 − γ1 ) + vk
Thus, firm j has no incentive to deviate from M by making an early
offer if:

πjM > πjD

W   W  
X k−1 j k−j
k−wj∗ 1
v(1 − γ2 ) + γ (1 − γ2 ) vk > γ1 (1 − γ1 ) + vk
k−j 2 j∗
k=j k=w

PW  PW h j∗
Since k−1 k−1 + 1
γ1 (1 − γ1 )k−w + 1
k−j > 1 and k=1 γ1 (1 − γ1 ) W vk > k=wj∗ W vk ,
firm j has no incentive to deviate if

W W  
γ2j (1
W k−j k−1
v(1 − γ2 ) + − γ2 ) vk > γ1 (1 − γ1 ) + vk
k=j k=1

W j−1 W  
W j k−j
X j k−j
k−1 1
v(1−γ2 ) + γ2 (1−γ2 ) vk − γ2 (1−γ2 ) vk > γ1 (1 − γ1 ) + vk
k=1 k=1 k=1

Recall vk = αk−1 v1 . Also, consider W to be sufficiently large such that

W → ∞.

W j−1 W
γ2j v1 (1−γ2 )1−j (α−αγ2 )k−1 − γ2j v1 (1−γ2 )1−j (α−αγ2 )k−1
> γ1 v1 (α−αγ1 )k−1
k=1 k=1 k=1

1 − (α − αγ2 )j
1 γ1
γ2j (1 − γ2 ) 1−j
− >
1 − α + αγ2 1 − α + αγ2 1 − α + αγ1
Hence, this simplifies to our equilibrium condition.
αj γ2j (1 − γ2 ) γ1
1 − α + αγ2 1 − α + αγ1

A.5 Proof of Proposition 2

Denote LHS of equilibrium condition (1) as L and RHS as R. We take first
order conditions with respect to the according variables to derive compara-
tive statics.
1. Substitute γ1 in R by γ1 = γ2 − θ. Firm is less likely to deviate with
increasing θ since:
∂R −(1 − α)
= <0
∂θ (1 − α + αγ2 − αθ)2

2. Firm is more likely to deviate with increasing γ1 since

∂R 1−α
= >0
∂γ1 (1 − α + αγ1 )2

3. From 1. and 2. , firm is less likely to deviate with increasing γ2 .

4. Since αγ2 < 1 and thus ∂ < 0, firm j is more likely to deviate with
increasing j.

A.6 Proof of Proposition 3
Proof. Rearrange the equilibrium condition in equation (1) as:
1 − α + αγ1 γ1
αj > j
1 − α + αγ2 γ2 (1 − γ2 )

Take derivative of LHS with respect to α, we obtain:

αj−1 {j(1 − α) + α {γ2 [j((1 − α) + αγ1 ) − 1] + γ1 }}

(1 − α + αγ2 )2

which is greater than zero when

(1 − α) + αγ1

A.7 Proof of Proposition 4

Proof. Consider the equilibrium M0 where firm d decides to match in Stage
1 and all other firms j 6= d decide to match in Stage 2. Let the threshold
worker of firm d be wd∗ .

If j ≥ wd∗ ,
W −1 h i k − 1
0 j−wd∗
γ j (1 − γ2 )k−j vk
=d = v(1 − γ2 ) W −1
+ (1 − γ1 ) k−j
1 − γ1 (1 − γ1 )
k−j 2
iW −1  
X k−1 j
+ 1 − (1 − γ1 ) γ (1 − γ2 )k−j vk
k−j 2
W −1  
X k−1 j
= v(1 − γ2 )W −1 + γ (1 − γ2 )k−j vk
k−j 2
W −1  
X k−1 j
− (1 − γ1 )j−w γ1 (1 − γ1 )k−j γ (1 − γ2 )k−j vk
k−j 2

< πjM

If j < wd∗ ,
d∗ −1 
0 k−1 j
=d = v(1 − γ2 )W −1
+ γ (1 − γ2 )k−j vk
k−j 2
W −1 h i k − 1
γ2j (1 − γ2 )k−j vk
+ 1 − γ1 (1 − γ1 )
< πjM
Let firm j’s deviation payoffs from M0 be πjD . Notice that if firm d has
the incentive to deviate from M and match in Stage 1, any firm j where
j > d will also have the incentive to deviate and match in Stage 1. Moreover,
if j < d, firm j gets to hire any revealed worker in Stage 1 before firm d
does. Thus, πjD = πjD .
Firm j has the incentive to deviate from equilibrium M only if πjD > πjM .
0 0
Since πjD = πjD and πjM > πjM , we know that if firm j has the incentive to
deviate from M, it definitely also has the greater incentive to deviate from
M0 .
Consider firm d0 which deviates from M0 . Repeating the same process,
we can show by induction that the lower bound required for any firm j
to deviate from matching in Stage 2 is always falling as we consider an
additional firm’s incentive to deviate. Hence, as the number of firms who
choose to match in Stage 1 gets large, the remaining firms will also face
stronger incentives to match in Stage 1.

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