Signaling in Matching Markets Peter Coles∗ Harvard Business School

We evaluate the effect of preference signaling in two sided matching markets. Firms and workers have strict preferences over members of the other side of the market. Each firm makes an offer to exactly one worker. Workers select the best offer from those available to them. The short time frame produces congestion and the market fails to reach a stable outcome. But if workers are able to signal their preferences, (i.e. their top choice firm,) firms may use this information as guidance for their offer choices. We find that in this signaling setting, it is optimal for firms to make use of these signals in the form of cutoff strategies. However, making use of signals imposes a negative externality on other firms. We find that on average, introducing a signaling technology increases the average number of matches, one possible measure of social welfare.