A competitive theory of equilibrium and disequilibrium unravelling in two-sided matching

I offer a competitive explanation for the rush toward early contracting in matching markets. The explanation does not rely on market power, strategic motives, or instability of the assignment mechanism. Uncertainty about work ers' ability will produce inefficient matching if contracts are formed earl y. However, the insurance gain from early contracting may outweigh the loss from inefficient matching. If firms are risk neutral, it is the mediocre f irms that will have the greatest incentive to offer early contracts. Openin g tip a market for early contracting will generally benefit the firms and h urt the workers. If firms are sufficiently risk averse, even the lowest-qua lity firms may want to offer early contracts, and a competitive equilibrium may not exist.