The dynamics of reorganization in matching markets: A laboratory experiment motivated by a natural experiment

We create an environment in which congestion forces agents to match ineffic iently early. We then introduce one of two centralized clearinghouse mechan isms. One of these has been successfully used to halt this kind of unraveli ng in a number of labor markets, while the other has failed. When it is cos tly for firms and workers to be mismatched compared with the costs of match ing early, the experimental observations reproduce the field observations. Furthermore, the experiment permits us to observe the transition between a decentralized and a centralized market, both when the centralized market fa ils to control unraveling and when it succeeds, at a level of detail unavai lable in field data.