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Abstract
This paper studies a model of large trading networks with bilateral con-
tracts. Contracts capture exchange, production, and prices, as well as frictions,
such as market incompleteness, price regulation, and taxes. In my setting,
a stable outcome exists in any acyclic network, as long as firms regard sales
as substitutes and standard continuity and convexity conditions are satisfied.
Thus, complementarities between inputs do not preclude the existence of stable
outcomes in large markets, unlike in discrete markets. Even when sales are not
substitutable, tree stable outcomes exist in my setting.
The model presented in this paper generalizes and unifies versions of gen-
eral equilibrium models with divisible and indivisible goods, matching mod-
els with continuously divisible contracts, models of large (two-sided) matching
with complementarities, and club formation models. Additional results explain
what kinds of equilibria are guaranteed to exist when substitutability in the
sale-direction and acyclicity are relaxed.
*
An extended abstract of this paper appeared in Proceedings of the 2017 ACM Conference of
Economics and Computation (EC17). I would like to thank Sandro Ambuehl, Eduardo Azevedo,
Eric Budish, Kevin Chen, Jeremy Fox, Jerry Green, Ben Golub, John Hatfield, Fuhito Kojima,
Michael Ostrovsky, Ross Rheingans-Yoo, Rachit Singh, Alex Teytelboym, Sahana Vasudevan, sem-
inar audiences at Harvard, and, especially, Scott Kominers for helpful comments. This research
was conducted in part while the author was an Economic Design Fellow at the Harvard Center of
Mathematical Sciences and Applications.
Department of Mathematics, Harvard University. Email: ravi.jagadeesan@gmail.com.
1
Contents
1 Introduction 3
2 Illustrative examples 9
2.1 Continuity helps ensure that stable outcomes exist . . . . . . . . . . . 9
2.2 Complications of complementarities . . . . . . . . . . . . . . . . . . . 10
2.3 Setbacks from cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4 Model 14
4.1 Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.3 Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.4 Preferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.5 Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6 Existence results 25
6.1 Existence results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.2 Relationship to Azevedo and Hatfield (2013) and Che et al. (2013) . . 27
6.3 Proof of Theorem 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8 Conclusion 32
A Multilateral matching 33
B Incorporating indifferences 36
Supplementary appendix 42
References 70
2
1 Introduction
Micro-level financial imperfections can have interesting consequences for the aggre-
gate behavior of markets. Imperfections limit the financial markets ability to equalize
agents valuations of payments that involve several currencies, trade credit, or other
non-cash financial instruments. Yet, the standard general equilibrium approach as-
sumes that complex payments can be summarized as transfers in a single numeraire.
For example, small firms sometimes finance purchases with trade credit, which is
subject to imperfectly-insurable idiosyncratic default risk. Trade credit is a relevant
feature of trading networks since it makes defaults propagate (Kiyotaki and Moore,
1997)1 a channel that explains a significant fraction of bankruptcies (Jacobson and
von Schedvin, 2015). However, creditors and debtors may value debt differently when
it is costly or impossible to obtain perfect insurance against default. Thus, amounts
paid in cash and amounts paid in trade credit cannot be combined into a single price.
As another example, imperfections in financial markets limit the currency markets
ability to absorb country-specific shocks (Gabaix and Maggiori, 2015).2 However,
financial imperfections also cause agents to value currencies differently in equilibrium,
making it impossible to consolidate payments in several currencies into a transfer in
a single numeraire. A similar issue arises whenever financial markets are imperfect
or otherwise incomplete, as agents may have different marginal rates of substitution
between forms of transfer in equilibrium.3 Thus, modeling the market incompleteness
discussed above requires a departure from the standard general equilibrium approach.
This paper analyzes trading networks with complex frictions using a matching
model. Modern matching theory captures many frictions (including market incom-
pleteness) in a unified framework by modeling contracts instead of goods. From a
conceptual perspective, contracts specify what goods or services are being traded as
well as pecuniary and non-pecuniary contract terms.4 Non-transferabilities and other
bounds on prices can be incorporated into the set of contract terms.5 Allowing con-
1
See also Battiston et al. (2007). Related analyses of contagion in financial markets include Allen
and Gale (2000) and Acemoglu et al. (2015).
2
Related work includes Alvarez et al. (2002) and Maggiori (2017).
3
That is, the pricing kernel, a distribution that is used to price assets when arbitrage is impossible,
is non-unique in incomplete markets (Harrison and Kreps, 1979; Hansen and Richard, 1987).
4
See Roth (1984b, 1985), Hatfield and Milgrom (2005), Ostrovsky (2008), Klaus and Walzl (2009),
Hatfield and Kominers (2012, 2015b, 2017), and Hatfield et al. (2013) for interpretations of contracts.
5
See, for example, Roth (1984a,b, 1985), and Hatfield and Milgrom (2005).
3
tract terms to specify multiple prices captures many forms of market incompleteness,
such as imperfectly-insurable default risk, imperfect financial markets, and imper-
fect convertibility. Taking agents to have preferences over contracts instead of goods
incorporates bargaining frictions and transaction taxes.6 Letting preferences (over
contracts) implicitly incorporate technological constraints allows matching to model
production.7
After the seminal contribution of Gale and Shapley (1962), stability is the stan-
dard solution concept in matching theory. Stability requires that no agent wants
to drop any of the contracts assigned to it and that no group of agents would like
to sign new contracts among themselves (while possibly dropping some previously-
signed contracts). Quite generally, stable outcomes behave similarly to competitive
equilibria.8 Thus, as Hatfield et al. (2013) have argued, matching may substitute for
general equilibrium analysis in settings in which frictions or market incompleteness
prevent the use of general equilibrium methods.9 In typical matching models, how-
ever, complementarities between inputs preclude the existence of stable outcomes10
unless strong restrictions are imposed on the structure of the market.11 On the other
6
See Jaffe and Kominers (2014), Galichon et al. (2016), and Fleiner, Jagadeesan, Janko, and
Teytelboym (2017). See also Noldeke and Samuelson (2015) for related interpretations of taxes.
7
See Ostrovsky (2008), Hatfield et al. (2013, 2015), and Hatfield and Kominers (2015b).
8
See Crawford and Knoer (1981), Kelso and Crawford (1982), Hatfield et al. (2013), Fleiner,
Jagadeesan, Janko, and Teytelboym (2017), Rostek and Yoder (2017), and Jagadeesan (2017d).
9
For example, in one-to-one matching with bounded prices, stable outcomes are essentially equiv-
alent to Dreze (1975) equilibria (Herings, 2015). See also Hatfield, Plott, and Tanaka (2012, 2016).
10
Hatfield and Kominers (2012) and Hatfield et al. (2013) have shown that full substitutability
which requires that inputs are substitutable for each other, that sales are substitutable for each other,
and that inputs and sales are complementary to one anotheris necessary in a maximal domain
sense for stable outcomes to exist. Full substitutability can also be regarded as the requirement that
all goods are substitutable (Gul and Stacchetti, 1999; Sun and Yang, 2006; Hatfield and Kominers,
2012; Baldwin and Klemperer, 2015; Hatfield et al., 2015). Some form of substitutability is also
necessary in a maximal domain sense for the existence of stable outcomes in two-sided matching
markets (Kelso and Crawford, 1982; Roth, 1984a; Echenique and Oviedo, 2004, 2006; Hatfield and
Kojima, 2008; Klaus and Walzl, 2009; Hatfield and Kominers, 2017; Schlegel, 2016).
11
Some papers have shown the existence of (pairwise) stable outcomes in many-to-one matching
with complementarities (Hatfield and Kojima, 2010; Hatfield and Kominers, 2015a; Hatfield, Komin-
ers, and Westkamp, 2015; Schlegel, 2016; Alva, 2017; Alva and Teytelboym, 2017), but these papers
do not consider many-to-many matching. Other papers have shown the existence of equilibria for
certain domains of preferences that allow for complementarities (Danilov et al., 2001; Pycia, 2012;
Baldwin and Klemperer, 2015), but these papers impose strong conditions on the permissible forms
of complementarity and substitutability. Recently, Rostek and Yoder (2017) have shown that stable
outcomes exist in discrete, multilateral matching when all contracts are complementary, but they
rule out any substitutability between contracts. Hatfield and Kominers (2015b) do not assume that
contracts are complementary or substitutable, but instead require that utility is transferable and
4
hand, inputs are complementary whenever the production of a good requires multiple
commodities or intermediates.12 Similarly, complementarities between technological
inputs are a key feature of modern manufacturing.13 Thus, the requirement that
inputs are substitutable prevents matching from being applied to the analysis of
complex, real-world markets.
Discreteness is partially responsible for the non-existence of stable outcomes in the
presence of complementarities (Azevedo and Hatfield, 2013). On the other hand, con-
tracts are often discrete in real-world markets once one looks closely enough (Ostro-
vsky, 2008). For example, because workers are quite heterogeneous, the discreteness
of labor contracts is relevant to small firms. Micro-level discreteness can cause aggre-
gate discontinuities, which is how discreteness obstructs the existence of equilibrium
in standard matching models. Such discontinuities may very well be an important
feature of markets in which few agents are present or few units of each contract are
traded. However, these discontinuities are less likely to be relevant in large markets.
For example, the discreteness of smartphones is quite salient to individual consumers
but irrelevant to global markets.
This paper analyzes trading networks in a large-market limit setting in which
the market is continuous in the aggregate, although micro-level discreteness may be
present. I show that complementarities between inputs do not obstruct the existence
of stable outcomes in such markets. Even under continuity, a mild substitutability
condition is necessary (in a maximal domain sense) for the existence of stable out-
comes. Since my model is based on matching with contracts, this paper allows for
frictions, market incompleteness, and discreteness, as discussed above.
The model studied in this paper features large and small firms that interact
in a trading network via an exogenously specified set of bilateral contracts. As in
Aumanns (1964) classic model of large markets, small firms each constitute an
infinitesimal portion of the economy since there is a continuum of small firms of each
type. For example, some small firms could represent individual workers supplying
labor. Like Edgeworth (1881) and Scarf (1962), I assume that there are finitely many
types of firms. As in Shapiro and Shapley (1978), Milnor and Shapley (1978), and
Hildenbrand (1970), I allow the economy to contain finitely many large firms, which
that contracts are continuously divisible.
12
Fox (2010, 2016) has shown empirically that inputs are complementary in auto manufacturing.
13
See, for example, Milgrom and Roberts (1990, 1995).
5
are not negligible in size. Large firms trade continuously divisible contracts/goods
with one another. On the other hand, small firms trade discrete contracts/goods,
both with one another and with large firms. Large firms view the contracts/goods
traded by small firms as divisible, just as consumers count bananas while distributors
measure quantities of bananas in pounds. Thus, the presence of a continuum of small
firms of each type substitutes for the divisibility of the contracts/goods traded by
large firms in ensuring aggregate continuity.
The existence of stable outcomes in my model relies on three key assumptions. The
first assumption is classical: it requires that large firms preferences are continuous
and convex.14,15 The second assumption, substitutability in the sale-direction, requires
that all firms regard sales as substitutes. This assumption allows complementarities
between inputs and is likely to be satisfied when no disassembly occurs during pro-
duction. The third assumption requires that the trading network is acyclic, so that
the network forms a vertical supply chain (Ostrovsky, 2008). Under these three as-
sumptions, stable outcomes exist. Unlike in two-sided markets, substitutability in
the sale-direction and acyclicity are both necessary in a maximal domain sense for
the existence of stable outcomes in my model.16
In large, complete markets without frictions, substitutability in the sale-direction
and acyclicity are not needed to ensure the existence of stable outcomes.17 Indeed,
classical results in general equilibrium theory guarantee the existence of competitive
equilibria in markets with continuously divisible goods/contracts under continuity
and convexity assumptions, while mild finiteness restrictions ensure the existence of
14
Competitive equilibria exist in large markets even with non-convexities because the presence of
a large number of small firms convexifies the aggregate excess demand correspondence (Aumann,
1966; Shapley and Shubik, 1966; Starr, 1969; Hildenbrand, 1970). However, one needs to impose
convexity conditions on the preferences of large firms, such as in my first assumption, because they
each play a non-negligible role in the economy even in the large-market limit (Hildenbrand, 1970).
15
The basic model presented in this paper implicitly assumes that large firms have complete,
continuous, and strictly convex preferences, as each large firm is assumed to have a (single-valued)
continuous choice function. Appendix B allows for weakly convex and incomplete preferences by
assuming that each large firm has an upper hemi-continuous non-empty compact convex-valued
choice correspondence.
16
Azevedo and Hatfield (2013) have shown that the substitutability of the preferences of one side
of a two-sided market ensures the existence of stable outcomes in settings with a continuum of firms.
However, Azevedo and Hatfields (2013) conditions do not define a maximal domain for the existence
of stable outcomes in large two-sided markets, as I show in Proposition 4 in Section 7.
17
Acyclicity is not necessary for the existence of stable outcomes in discrete trading networks with
complete markets (Hatfield et al., 2013; Fleiner, Jagadeesan, Janko, and Teytelboym, 2017).
6
competitive equilibria in large markets with transferable utility.18 Recently, Fleiner,
Jagadeesan, Janko, and Teytelboym (2017) have shown that competitive equilibria
give rise to stable outcomes whenever financial instruments are rich enough to equalize
marginal rates of substitution across agentsi.e., when the financial market is com-
plete.19,20 Therefore, continuity, convexity, and mild finiteness restrictions together
ensure that stable outcomes exist in large markets with transferable utility.
The existence of stable outcomes is more subtle when there are frictions or the
financial market is incomplete. Competitive equilibria may not yield stable outcomes
(Fleiner, Jagadeesan, Janko, and Teytelboym, 2017). Furthermore, transfers may be
multidimensional, making it unclear how to define competitive equilibrium. In order
to capture frictions, this paper does not construct stable outcomes from competitive
equilibria but instead builds them directly by imposing substitutability in the sale-
direction and acyclicity.
In some settings, it may be difficult for agents to identify and implement complex
recontracting opportunities (blocks). Thus, the observed market outcome may not
be stablewhile simple blocks are unlikely to exist in equilibrium, complex blocking
opportunities may persist.21 As a complement to the main result on the existence
of stable outcomes, I relax the definition of stability to obtain existence results that
require weaker hypotheses than the main result. When the network has cycles, there
are outcomes that cannot be blocked by a sequence of proposals of sets of contracts
by their sellers. I call such outcomes seller-initiated-stable. Seller-initiated-stable
18
See Azevedo et al. (2013) Azevedo and Hatfield (2013). Competitive equilibria may not exist in
large markets with indivisibilities and strong income effects due to discontinuities in the aggregate
excess demand correspondence (Broome, 1972; Mas-Colell, 1977).
19
See also Hatfield et al. (2013), Hatfield and Kominers (2015b), and Rostek and Yoder (2017).
Hatfield et al. (2013), Hatfield and Kominers (2015b), and Rostek and Yoder (2017) assume that
utility is transferable. Although Fleiner, Jagadeesan, Janko, and Teytelboym (2017) work with
economies with finitely many firms, their proof generalizes to the large-market limit setting (Ja-
gadeesan, 2017f).
20
When the presence of multiple forms of transfer is driven by uncertainty, market completeness
requires that all agents can costlessly trade Arrow (1953) securities corresponding to every possible
future state. Market completeness rules out complex frictions, such as variable transaction taxes
and imperfectly-insurable default risk, but permits simple frictions, such as fixed shipping costs. See
Fleiner, Jagadeesan, Janko, and Teytelboym (2017) and Jagadeesan (2017d) for detailed discussions
of market completeness in the context of matching.
21
For example, Fox and Bajari (2013) analyze the FCC spectrum auction by assuming that the
observed outcome is pairwise stable but not necessarily stable. Thus, Fox and Bajari (2013) assume
that there is no single contract that both counterparties would like to add (possibly while dropping
some previously signed contracts), but allow the possibility that there are groups of contracts that
are jointly desirable.
7
outcomes cannot be blocked by acyclic sets of contracts, but can be blocked by sets
of contracts with cycles. Intuitively, seller-initiated blocking proposal sequences and
acyclic blocking sets do not require coordination across the whole trading network
to implement, making acyclic and seller-initiated blocking opportunities less likely
to persist than general blocks. Seller-initiated-stability may be a reasonable solution
concept in settings where it is difficult for a buyer to make requests to potential
sellers. When sales are not substitutable, I show that there are still outcomes that
cannot be blocked by a sequence of proposals of single contracts. I call such outcomes
sequentially stable. Sequential stability is a network-based strengthening of pairwise
stability22 and may be a reasonable solution concept when it is difficult for agents to
identify and propose several blocking contracts on their own. From a technical per-
spective, I exploit the existence of sequentially stable outcomes to prove the existence
of seller-initiated-stable and stable outcomes.
While existence results are interesting in their own right, they are also crucial to
the underlying logic of structural empirical methods (see Section IID in Fox, 2017).
These methods assume that the observed outcome is pairwise stable and hence pre-
suppose that a (pairwise) stable outcome exists.23 Recent work by Fox (2010, 2016)
on auto part markets and Fox and Bajari (2013) on the FCC spectrum auction have
exploited results on the existence of equilibria in large markets with transferable util-
ity to estimate demand for complementary goods. The results of this paper open up
the possibility of developing similar structural estimation methods for two-sided and
network settings without substitutability or transferable utility, imposing sequential
stability as an analogue of pairwise stability.
From a conceptual perspective, this paper relates to and connects several strands
in the general equilibrium and matching literatures. First, this paper generalizes ver-
sion of previous large-market matching models, which focused on two-sided markets
and imposed structure on the set of agent types. By modeling continuously divisible
contracts, this paper encapsulates versions of classical general equilibrium models,
including models with incomplete markets. By incorporating discrete contracts in a
22
Sequential stability refines tree stability (in the sense of Ostrovsky, 2008) and trail-stability (in
the sense of Fleiner et al., 2015). See Jagadeesan (2017c) for the details regarding these relationships.
23
Initial work focused on two-sided one-to-one matching markets with transferable utility (see,
e.g., Choo and Siow, 2006), but some papers have studied one-to-one and many-to-one matching
without transfers but with substitutable preferences (Srensen, 2007; Logan et al., 2008; Boyd et al.,
2013; Agarwal, 2015).
8
large-market setting, the model presented in this paper subsumes versions of large-
market general equilibrium models with indivisibilities. The use of the language of
matching with contracts allows this paper, unlike general equilibrium, to capture fric-
tions. I hope that the framework developed in this paper can serve to unify general
equilibrium with matching-theoretic models of markets with frictions.
The remainder of this paper is organized as follows. Section 2 explains the re-
sults through illustrative examples. Section 3 discusses related literature. Section 4
presents the primitives of the model and defines stability. Section 5 describes several
other stability properties, both as solution concepts and as technical tools. Sec-
tion 6 presents the existence results. Section 7 discusses the maximal domain results.
Section 8 concludes. Appendices A and B extend the basic model to incorporate
multilateral contracts and indifferences, respectively. The supplementary appendices
(Appendices CF) present the omitted proofs.
2 Illustrative examples
In discrete trading networks, complementarities between inputs or between sales, as
well as cycles, preclude the existence of stable outcomes (Hatfield and Kominers,
2012). This section provides three examples that illustrate the results of the paper
by showing how aggregate continuity interacts with Hatfield and Kominerss (2012)
negative results. The first example illustrates the main result of this paper by giving
a supply chain with complementary inputs in which continuity restores the existence
of stable outcomes. The second example shows that stable outcomes may fail to exist
when inputs are complementary and sales are complementary, highlighting the role
of substitutability in the sale-direction in my existence results. The third example
shows that, as in discrete networks (Hatfield and Kominers, 2012), cycles can obstruct
the existence of stable outcomes. The latter two examples also feature outcomes that
satisfy weaker stability properties.
9
1
1
n V n
HV
1
1
(
O ? 6
2
2
2
2
(b) Contracts in Example 2. (c) Contracts in Example 3.
(a) Contracts in Example 1.
of three types, , 1 , and 2 . Firms of types 1 and 2 can sell to firms of type
directly, and can sell to via the intermediary . As shown in Figure 1(a) on page
10, there are six contracts: 1 , 2 , 1 , 2 , 1 , and 2 .
Each seller of type 1 would like to sell up to one contract and prefers to sell 1 .
Each seller of type 2 would like to sell up to one contract and prefers to sell 2 .
Each buyer of type would like to buy up to one contract and prefers to buy 1 .
Intermediary can perfectly transform units of into units of .24 Buyer views
1 and 2 as perfect complements.
In this economy, there is a unique stable outcome, in which 1/2 unit of each
contract is traded. In the discrete version of this economy, where preferences are the
same but only exactly 0 or 1 units of each contract can be traded, there is no stable
outcome.
10
Example 2. There are two large firms, and , and a unit mass of small firms of type
. As shown in Figure 1(b) on page 10, there are three contracts: , , and . Seller
views and as perfect complements. Seller would like to sell as much of as
possible. Each buyer of type has preference {, } {, } .
In this economy, there is no stable outcome. Indeed, in any individually rational
outcome, the same amounts of and must be traded by construction. Thus,
cannot be traded in any individually rational outcome. If no trade occurs, then
{, } is a blocking set; if trade occurs, then { } is a blocking set. However, the
outcome in which no trade occurs is not blocked by any tree of contracts. As will
be discussed in Example 4 in Section 5.3, the no-trade outcome is even sequentially
stable.
11
in Appendix A models multilateral matching with a continuum of firms, generalizing
Section 5 in Azevedo and Hatfield (2013). The case of this paper in which unit-supply
small firms match with large firms in a two-sided market recovers the discrete-type
case of Che et al.s (2013) model25 since Che et al. (2013) allow indifferences, the
embedding requires the extension of Appendix B. Section 6.2 and Appendices A.4
and B.5 discuss the technical details of these relationships.
Motivated by the ability of couples to enter the U.S. medical residency match
together, another strand in the literature has focused specifically on the existence
of stable outcomes in matching with couples (Kojima et al., 2013; Ashlagi et al.,
2014). These papers have studied large, finite random matching markets. Azevedo
and Hatfields (2013) results imply that stable outcomes exist in a large-market limit
in which all residency programs are small. The results of this paper imply that stable
outcomes exist even in the limit in which there are some large residency programs.
A separate strand in the matching literature has focused on large markets with
substitutable preferences. Those papers exploit largeness to develop tractable models
(Bodoh-Creed, 2013; Abdulkadiroglu et al., 2015; Azevedo and Leshno, 2016), and to
study issues of incentives (Immorlica and Mahdian, 2015; Kojima and Pathak, 2009)
and core convergence (Ashlagi et al., 2017). Under substitutability, however, stable
outcomes exist even in discrete markets, while this paper focuses on settings in which
continuity is essential to the existence of stable outcomes.
The case of this paper in which there are no small firms models matching with
continuously divisible contracts. Previous papers in this strand of the matching lit-
erature have either considered specific classes of contract structures and preferences
(Fleiner, 2014; Kiraly and Pap, 2013; Cseh et al., 2013; Cseh and Matuschke, 2017) or
assumed that utility is transferable (Hatfield and Kominers, 2015b). This paper works
with general contract structures and does not assume that utility is transferable.
12
they exist, but allows for multidimensional transfers.26 As discussed in the introuduc-
tion, this paper also allows frictions that are not permitted in the standard general
equilibrium approach.
The precise connection of this paper to the general equilibrium literature is as
follows. The case of this paper with no small firms nests discrete-price versions of
classical general equilibrium models (Arrow and Debreu, 1954; McKenzie, 1954, 1959).
Because preferences over contracts implicitly capture budget constraints, this paper
also naturally incorporates settings with multiple budget constraints, such as general
equilibrium models with incomplete markets (Radner, 1968, 1972; Hart, 1974, 1975;
Cass, 2006; Werner, 1985; Geanakoplos and Polemarchakis, 1986; Duffie, 1987).27
The case of this paper with no large firms captures discrete-price versions of large-
market general equilibrium models with indivisibilities (Mas-Colell, 1977; Azevedo
et al., 2013; Azevedo and Hatfield, 2013).28 The model presented in Appendix A
encapsulates discrete-price versions of club models with a continuum of firms (El-
lickson et al., 1999) and multilateral matching models with continuously divisible
contracts (Hatfield and Kominers, 2015b). The existence results presented in this
paper are matching-theoretic analogues of existence results in the general equilibrium
literature.
The extension presented in Appendix B allows preferences to be incomplete. Thus,
this paper proves matching-theoretic analogues of results on existence of general equi-
librium with incomplete preferences (Schmeidler, 1969; Mas-Colell, 1974; Shafer and
Sonnenschein, 1975; Yamazaki, 1978; Aliprantis and Brown, 1983). To my knowl-
edge, this is the first paper in matching theory to consider incomplete preferences
and intransitive indifferences.
26
Like Radner (1972) and unlike other papers (e.g., Cass, 2006; Werner, 1985; Geanakoplos and
Polemarchakis, 1986; Duffie, 1987), I impose exogenous upper bounds on trade.
27
Matching naturally captures both settings in which assets pay off in commodities (Radner, 1972;
Hart, 1975; Geanakoplos and Polemarchakis, 1986) and settings in which assets pay off in the units
of account (Hart, 1974; Cass, 2006; Werner, 1985; Duffie, 1987).
28
See also Section 6 in Azevedo and Hatfield (2013).
13
4 Model
4.1 Firms
There is a finite set large of large firms. Intuitively, each member of large can
be party to a positive proportion of contracts in the market (as the market grows).
There is also a finite set small of small firm types. Intuitively, small firms each
form a bounded number of contracts (as the market grows).
Formally, there is continuum of each type of small firm, but only one instance of
each large firm. For each small , let R0 be the mass of firms of type that
are present. Let = large small denote the set of firm types.
4.2 Contracts
Let be a finite set of contracts. Each has an associated buyer type b()
and seller type s() . I always assume that b() = s() for all .
As in the literature, contracts (conceptually) specify what is being traded and who
is trading, as well as prices and other contract terms (Roth, 1984b, 1985; Hatfield
and Milgrom, 2005; Ostrovsky, 2008; Klaus and Walzl, 2009; Hatfield and Kominers,
2012, 2017). Since I do not impose any extra structure on the set of contracts, prices
can be multidimensional. Thus, contracts can specify complex payments, capturing
(partial) financing by trade credit and payments in several currencies. More generally,
contracts can specify payments that incorporate several forms of transfer, which is a
relevant feature in settings with incomplete financial markets (see Section 1).
Each small firm of type trades a set of contracts .29 Thus, in the
aggregate, a small firm type trades a mass R0 of contracts. Large firms trade
masses of continuously divisible contracts among one another and discrete contracts
with masses of small firms, so that large firms each trade a mass R0 of contracts.
More formally, I summarize aggregate trade in the economy by a mass of contracts
in the following fashion. When b(), s() small , a mass of contract represents
the trade of between mass of firms of type b() and mass of firms of type
s(). When b() small and s() large , a mass of contract represents
29
I implicitly require each small firm to trade at most one unit of each contract. This assumption
plays no role in the existence results, but is made for sake of consistency with the matching literature.
14
the trade of between large firm s() and mass of small firms of type b().30
When b(), s() large , a mass of contract represents the trade of units of
continuously divisible contract between large firms b() and s().
For each , there is an exogenous upper bound M on the amount of that
can be traded.31,32 Thus, an allocation, which specifies how much of each contract is
traded, is an element of
X=
[0, M ] .
I always assume that M for all {b(), s()} small , so that it is feasible for
all small firms of a given type to trade all possible contracts. However, preferences
and the mass vector generally restrict trade in equilibrium.
Given firm types , and a set of contracts , let
= { | s() = }
= { | b() = }
=
=
denote the sets of contracts in that are sold by (resp., bought by , involve ,
are sold by to ). Given an allocation X and a firm , let
( )
= , 0r
( )
= , 0r
( )
= , 0r
denote the masses of contracts that are bought by type (resp., are sold by , involve
30
The homogeneity of the continuum of firms of type b() ensures that s() is indifferent as to
exactly which firms of type b() trade with s().
31
The bounds M are analogous to the bound in Radner (1972) and the bounds max in Hatfield
and Kominers (2015b). Hart (1974, 1975) has illustrated the role of such bounds in deriving general
results on the existence of equilibrium in incomplete markets. For particular asset structures, the
bounds on the trade of contracts can be removed (see, e.g., Cass, 2006; Werner, 1985; Geanakoplos
and Polemarchakis, 1986; Duffie, 1987). Restricting the asset structure corresponds to imposing
conditions on the set of contracts and firms choice correspondences in the matching model studied
in this paper. This paper focuses on general contract structures and choice functions, necessitating
the imposition of exogenous bounds on the quantity of trade.
32
In Examples 13 in Section 2, I set M = 1 for all contracts .
15
) under . Let X = [0, M ] denote the set of bundles of contracts that can
be traded by firm (if large ) or in the aggregate by firms of type (if small ).
4.3 Outcomes
An allocation does not determine an outcome as one has to specify which firms of
each small firm type trade. Let be a small firm type. A distribution for specifies
the masses of firms of type that trade each possible set of contracts .
[ ]( )
Definition 1. Let small . An distribution for is a vector 0,
satisfying
= .
for .
An outcome specifies how much of each contract is traded (an allocation) and how
the mass of contracts traded by each small firm type is distributed among the firms
of that type (a distribution for for each small type ). Distributions do not have
to be specified for large firms since there is only one instance of each large firm.
^
Definition 3. An outcome consists(of an) allocation X and, for each small ,
^ ^
a distribution for ^ satisfying A = ^.
4.4 Preferences
Large firms have choice functions defined over masses of contracts involving . More
formally, each large firm large has a choice function : X X , assumed to
satisfy () for all X .
16
Small firm types trade sets of contracts, and therefore have preferences defined
over sets of contracts involving . Formally, each type small has a complete,
strict preference over ( ). Define choice function : ( ) ( ) by33
( ) = max ( ).
4.5 Stability
Stability requires individual rationality and the absence of a block (Roth, 1984b;
Blair, 1988; Hatfield and Milgrom, 2005; Echenique and Oviedo, 2006; Klaus and
Walzl, 2009; Hatfield and Kominers, 2012, 2017). As in Roth (1984a), individual
rationality requires that no firm wants to drop any contracts assigned to it.
( ( ) )
^
Definition 4. An outcome = , is individually rational if:
^small
Every large firm wants mass when given access to the contracts it already
signs (possibly while dropping masses of contracts that are not in ()).
For every small firm type , the mass can be distributed to the firms of type
such that every firm wants all of the blocking contracts assigned to it when
given access to the contracts that it already signs (possibly while dropping some
of the previously-signed contracts).
The motivation for this definition is that it is the limit of the definition of blocks in
discrete matching (Hatfield and Kominers, 2012, 2017) as the number of small agents
grows large and contracts between large agents become continuously divisible.34 In
33
I could instead take the choice functions as the primitives and assume that the functions
satisfies the irrelevance of rejected contracts condition (Aygun and Sonmez, 2012, 2013). For ease of
notation in the proofs, I instead assume that small firms choice functions satisfy the strong axiom
of revealed preferences. A companion note (Jagadeesan, 2017e) presents a detailed analysis of the
role of choice functions in this setting, showing that the irrelevance of rejected contracts condition
for is the key to ensuring that aggregate demand is continuous. See also Footnote 42.
34
See Galichon et al. (2016) for a formal result in this vein, in a different setting.
17
two-sided markets with no large firms, my definition of stability agrees with Azevedo
and Hatfield (2013).
( ( ) )
^
Definition 5. A non-zero mass R0 blocks an outcome = ,
^small
if + M and:
for all large , we have ( + )() ( + )() ; and
1 , 0 r = .
( ) ( )
1{ } , 0( )r{ } and
=1 =1
18
Section 5.1 defines blocking sets and strong stability. Section 5.2 defines strong
tree stability and strong acyclic stability. Section 5.3 defines sequential stability and
relates sequential stability to strong stability and strong tree stability. Section 5.4
defines seller-initiated-stability and substitutability in the sale-direction and relates
seller-initiated-stability to strong acyclic stability and sequential stability.
if is a small firm type, then a positive mass of firms of type demand when
given access to an appropriately chosen subset of (in addition to the
previously-signed contracts).
( ( ) )
^
Definition 6. Let be a firm type and let = , be an
^small
outcome. A set is rational for at given if and:
A set of contracts is blocking if it is a rational deviation for all firm types. The
corresponding stability property is called strong stability.
35
The terminology rationality in this setting is due to Fleiner et al. (2015). My definition of
rationality is less restrictive than that of Fleiner et al. (2015).
19
Definition 7. A non-empty set of contracts blocks an outcome if is
rational for at for all . An outcome is strongly stable if it is individually
rational and is not blocked by any set of contracts.
Firms need not agree on quantities of contracts for a set to be blocking. The
following proposition formally shows that blocking masses give rise to blocking sets,
so that strong stability indeed strengthens stability. Thus, I focus on proving the
existence of strongly stable outcomes in the rest of the paper.
The last stability property, which is new to this paper, interpolates between strong
tree stability and strong stability. This stability property, strong acyclic stability,
rules out blocking sets that are directed acyclic. Acyclicity makes makes blocking
sets easier implement because acyclic blocking sets flow from terminal sellers (within
the block) to terminal buyers (within the block). Blocking sets that contain several
contracts between a pair of agents could be acyclic but are never trees. This discussion
motivates the consideration of strongly acyclically stable outcomes.
20
1, . . . , , where 0 = . An outcome is strongly acyclically stable if it is individually
rational and is not blocked by any acyclic set of contracts.
((1 , 1 ) , . . . , ( , )) (() )
For all , the firm type wants to propose all the contracts in when given ac-
cess to the previously signed contracts and (some of) the set (1) of contracts
that have been proposed to before stage .
Some firm wants some of the contracts that have been proposed to it by the
end.
21
there exists and such that {} is rational for at given .
Here, we write
= .
| =
Example 4. Recall that, in the economies studied in Examples 2 and 3, there are two
large firms, and , and one small firm type . As shown in Figures 1(b) and 1(c)
on page 10, there are three contracts, , , and . Contracts and are traded by
and and contract is traded by and .
Examples 2 and 3 observed that the no-trade outcome is strongly tree stable in
these economies. The no-trade outcome is even sequentially stable in these examples.
Suppose that outcome is blocked by a tree of contracts. Fixing a root in the
tree, one can build a rooted proposal sequence from the blocking tree so that all
proposals flow toward the root in the tree. This rooted proposal sequence blocks .
Thus, sequential stability implies strong tree stability.
In particular, sequential stability refines path stability and pairwise stability. Se-
quential stability also strengthens Fleiner et al.s (2015) trail-stability property.37 As
will be shown in the next section, sequential stability has a convenient relationship
with strong acyclic stability, in that sequential stability and substitutability in the
sale-direction together imply strong acyclic stability. Thus, sequential stability pro-
vides a conceptually natural and technically useful strengthening of path stability,
pairwise stability, and trail-stability.
37
See also Jagadeesan (2017c) for a discussion of sequential stability in discrete trading networks.
22
While Lemma 2 is technically useful, it also illustrates a sense in which trees are
easier to implement than other blocking sets. To be precise, Lemma 2 shows that any
potential blocking tree can be decentralized to a blocking rooted proposal sequence,
and hence does not require coordination across the network to implement. Section 5.4
gives a related interpretation of acyclic blocking sets.
On the other hand, any blocking proposal sequence gives rise to a blocking set
by considering the set of contracts in the proposal sequence that the non-proposing
counterparty desires. Thus, stability implies sequential stability, thereby reconciling
the approaches to stability via blocking sets and blocking proposal sequences.
5.4 Seller-initiated-stability
I say that a proposal sequence is seller-initiated if every proposed contract is proposed
by its seller. Ruling out seller-initiated blocking proposal sequences defines a stability
property. This stability property is natural when it is difficult for buyers to identify
willing sellers but might be easy for sellers to find potential buyers.
Example 5. Recall that, in the economy studied in Example 3, there are two large
firms, and , and one small firm type . As shown in Figure 1(c) on page 10, there
are three contracts, , , and , and contracts and form a cycle.
Example 3 observed that the no-trade outcome is strongly tree stable in this
economy. The no-trade outcome is even seller-initiated-stable in this economy.
Seller-initiated-stability is technically useful due to its relationships with strong
acyclic stability and sequential stability. Any acyclic set defines a seller-initiated
proposal sequence by letting proposals flow from firms who dont buy any contracts
in to firms who dont sell any contracts in . If blocks an outcome, then the
corresponding seller-initiated proposal sequence blocks the outcome as well. Thus,
seller-initiated-stability implies strong acyclic stability.
23
Lemma 3. Every seller-initiated-stable outcome is strongly acyclically stable.
24
Proof. See Appendix F.
As will be seen in Section 6.1, Lemma 4 plays a key role in proving the existence
of seller-initiated-stable, strongly acyclically stable, and strongly stable outcomes. I
do not know of an analogue of Lemma 4 for stability properties defined in terms of
blocking sets or blocking masses.
6 Existence results
Section 6.1 states the existence results. Section 6.2 discusses the relationship of the
existence results to Azevedo and Hatfield (2013) and Che et al. (2013). Section 6.3
sketches the proof of the existence of sequentially stable outcomes (Theorem 1).
The first result asserts that continuity and the irrelevance of rejected contracts
condition (for large firms choice functions) together ensure that a sequentially stable
outcome exists.
Because every sequentially stable outcome is strongly tree stable (Lemma 2),
strongly tree stable outcomes also exist under the hypotheses of Theorem 1.
40
Aygun and Sonmez (2012, 2013) have shown that the irrelevance of rejected contracts condition
is crucial to the existence of stable outcomes in matching with contracts.
41
In settings without indifferences, the irrelevance of rejected contracts condition is equivalent to
the weak axiom of revealed preferences.
25
Corollary 1. Under the hypotheses of Theorem 1, a strongly tree stable outcome
exists.
26
6.2 Relationship to Azevedo and Hatfield (2013) and Che
et al. (2013)
Corollary 4 generalizes recent results of Azevedo and Hatfield (2013) and Che et al.
(2013) on the existence of stable outcomes in large two-sided matching markets. A
matching market is two-sided if = with = and (b(), s())
for all . Such markets are clearly acyclic. In these markets, (resp. )
is automatically substitutable in the sale-direction for all large (resp.,
small ).
The case of the two-sided model in which large = recovers the model of Azevedo
and Hatfield (2013). Corollary 4 strengthens and generalizes Theorem 1 in Azevedo
and Hatfield (2013). On the other hand, the case of the two-sided model in which
= large , = small , and sellers each sign at most one contract recovers the case
of the model of Section 3 in Che et al. (2013) in which the space of seller/worker
types is a finite set. Corollary 4 strengthens and generalizes the finite-type case of
Theorem 2 in Che et al. (2013). Appendices A.4 and B.5 discuss similar relationships
in multilateral matching and in settings with indifferences, respectively.
1 0 = .
27
Given X , define inductively for = , 1, . . . , 0 by
{ { }}
() = min (), min () () . (1)
> >
28
auxiliary allocations that are used to deal with lumpy demand.45
Third, I show has a fixed point, which yields a sequentially stable outcome. It
turns out that is the analogue of in the usual correspondence between
fixed points and stable outcomes (Adachi, 2000, 2017; Fleiner, 2003; Hatfield and
Milgrom, 2005; Ostrovsky, 2008; Hatfield and Kominers, 2012, 2017; Fleiner et al.,
2015). I distribute contracts in among small firms according to the functions
formally, define
( ( ( )) )
^
( ) = , ( )^ .
^small
29
Intuitively, blocking masses and seller-initiated proposal sequences are rich enough
to detect any complementarities between sales in the preferences of small firms. It
follows that the substitutability in the sale-direction of the preferences of small firms
is necessary in a maximal domain sense for seller-initiated-stable or stable outcomes
to exist in large trading networks.46
(4) the economy does not have a seller-initiated-stable outcome or a stable outcome
for any .
A version of Theorem 2 is also true for large firms. As there are only finitely
many possible preferences for small firms, small firms preferences are not always rich
enough to witness all possible complementarities between sales in the preferences of
large firms. Thus, I assume that all firms are large in order to formulate the analogue
of Theorem 2 for large firms. This assumption can be relaxed considerably, but
without providing further intuition and at the expense of complicating the statement
of the theorem.
30
(1) is substitutable in the sale-direction, continuous, and satisfies the irrelevance
of rejected contracts condition for all r {f }; and
(2) the economy does not have a seller-initiated-stable outcome or a stable outcome.
f1 f = .
If M > 0 for all , then there exist preferences for all types such that:
(3) the economy does not have a stable outcome for any R>0small .
31
Proposition 4. Suppose that = with = and that (b(), s())
for all . Let s be arbitrary. Suppose furthermore that is substitutable
in the sale-direction, continuous, and satisfies the irrelevance of rejected contracts
condition for all large r {s }; and is substitutable in the sale-direction for all
small r {s }. If there exists Z s such that |b(Z)| = |Z| and either
(a) s large , the choice function s is continuous and satisfies the irrelevance of
rejected contracts condition, and s ()s rZ = 0 for all Xs ; or
8 Conclusion
This paper developed a model of trading networks in which a large number of firms or
goods are present. Aggregate continuity helps restore the existence of stable outcomes.
I introduced stability properties based on sequential blocking conditions to obtain
existence results in trading networks with complementarities and cycles. My model
captures complex frictions that are ruled out by the standard general equilibrium
approach. Previous matching models of networks, while also capturing frictions,
suffered from the non-existence of equilibrium in the presence of complementarities,
preventing matching from being applied to analyze complex, real-world markets.
This paper opens several avenues for future research. First, one could develop
structural empirical methods that assume that the observed outcome is sequentially
stable, underpinned by the existence results of this paper. Second, the real-world
validity of the novel solution concepts, sequential stability and seller-initiated-stabil-
ity, could be investigated. Third, the problem of finding computationally efficient
algorithms to find or approximate equilibria in my model could be explored.49
49
The proof of Theorem 1 relies on Brouwers Fixed-Point Theorem and hence does not yield an
efficient algorithm to compute or approximate equilibria.
32
A Multilateral matching
This section extends the existence results to multilateral matching. Appendix A.1
adapts the model to allow for multilateral contracts. Appendix A.2 shows that
strongly tree stable outcomes exist, and Appendix A.3 shows that stable outcomes
exist if all firms preferences are substitutable. Appendix A.4 relates the existence
results to Azevedo and Hatfield (2013).
A.1 Model
I model multilateral contracts with multi-unit demand following Appendix B in
Azevedo and Hatfield (2013). There is a finite set of firm types (with the same
structure as in Section 4.1) and a finite set of contracts . There is also a finite set
of roles R , and each role r R is associated to a firm type a(r ) . Each contract
involves a non-empty finite set of roles r() R . I always assume that roles
are contract-specificformally, I assume that r() r() = whenever = .
It can be assumed without loss of generality that R = r(). Firms have preferences
over bundles of roles.
When a(r()) large , mass of contract specifies that mass of type a()
small will trade with a() large . When a(r()) large , mass of contract
specifies that units of the continuously divisible contract will be traded among
firms a(r()). As in Section 4.2, there is an upper bound M on the amount of that
can be traded for each . I assume that M for all a(r()) small . By
abuse of notation, I write Mr = M whenever r r().
For S R , , and , let
S = {r S | a(r ) = }
= r( )
denote the set of roles in S that are associated to and the set of roles involved in
contracts in that are associated to , respectively. Given X , define X
by ( )r = for all r r() . Allocations, preferences, outcomes are exactly as in
Section 4, and individual rationality, rational deviations, blocking sets, and stable
outcomes are exactly as in Section 5.
33
A.2 Tree stability in multilateral matching
As in settings with bilateral contracts, continuity and convexity alone ensure the
existence of strongly tree stable outcomes in large multilateral matching markets. In
order to define strong tree stability, I need a notion of a tree in a multilateral economy.
Trees are sets of contracts that are acyclic in the sense of hypergraphs.
Definition 17. (Hatfield and Milgrom, 2005) For small , choice function
is substitutable if for all and = such that / ( {}), we
have / ( {, }).
34
For large , choice function is substitutable if for all X and
= with r{} = r{} , we have ( ) () .50
Substitutability, in addition to continuity and the irrelevance of rejected contracts
condition, ensures the existence of stable outcomes in large, multilateral matching
markets. Thus, a form of Corollary 4 generalizes to multilateral matching.
Corollary 6. Suppose that:
is continuous and satisfies the irrelevance of rejected contracts condition for
all large ;
35
B Incorporating indifferences
This section extends the results to settings with indifferences, including intransitive in-
differences. Firms, contracts, and outcomes are exactly as in Section 4. Appendix B.1
presents the model of preferences with indifferences. Appendix B.2 defines strong sta-
bility. Appendix B.3 describes an analogue of substitutability in the sale-direction.
Appendix B.4 presents the existence results, and Appendix B.5 relates the extended
model to Che et al. (2013).
to be the set of maximal elements of ( ) with respect to (the restriction of) the
partial order .
Intuitively, individual rationality requires that no firm strictly prefers dropping
some of the contracts assigned to it. In discrete matching with contracts settings with
indifferences, a set is individually rational for if () (see, e.g., Hatfield
et al., 2013; Che et al., 2013). This definition extends naturally to the setting of large
markets.
( ( ) )
^
Definition 4 . An outcome = , is individually rational if:
^small
36
markets, and defines seller-initiated-stability in the extended model.
First, I adapt the definition of rational deviations given in Section 5.1 to settings
with indifferences. In discrete matching with indifferences, Hatfield et al. (2013)
(effectively) call a rational for at if always demands all of when given
access to i.e., if for all ( ). I modify Hatfield et al.s
(2013) definition analogously to Definition 6.51
( ( ) )
^
Definition 6 . Let be a firm type and let = , be an
^small
outcome. A set is rational for at given if and
37
weakening of one part of Hatfield et al.s (2015) CEFS condition, requires that sales
are substitutable as the set of possible sales expands (holding the set of available buys
fixed).52
38
Definition 15 . For large , choice correspondence satisfies the irrelevance of
rejected contracts condition if for all X and all ( ) with , we
have ().53
39
Then, a strongly stable outcome exists.
{}s() { } { } for all and
( ) and
/ ( ) ,
40
with s() = and b() = for all . Define by . Define
: [0, 2] [0, 2] by () = {min{, 1}} and : [0, 2] [0, 2] by
[0, ] if 1
() =
{} if > 1.
The choice correspondences and are clearly upper hemi-continuous and maxi-
mize quasi-concave utility functions.
( ( ))
Consider the outcome = (1 , 0 ) , 1{} , 1 , 0()r{,{}} where 1 unit of to
and 1 unit of remains unmatched. The set { } blocks , but is stable in the
sense of Definition 5 in Che et al. (2013).
The following proposition shows that, assuming that is non-empty compact-
valued and satisfies Che et al.s (2013) revealed preference property, strong stability
implies stability in the sense of Definition 5 in Che et al. (2013). Recall that :
X X satisfies the revealed preference property if satisfies the irrelevance of
rejected contracts condition and () ( ) whenever 0 and there
exists ( ) with .
41
Supplementary appendix
42
D.1 Aggregate demand of small firm types
Let small be a small firm type. Let be a complete, strict preference that
refines . Write
as
0 = .
Define and according to (1) in Section 6.3. The first claim asserts that no small
firm can want any contract of which there is excess supply.
= { | () < }.
/ ( ), then () = 0.
If
The second claim asserts that the aggregate demand functions satisfy the irrele-
vance of rejected contracts condition.
43
D.2 The Gale-Shapley operator
I begin by extending the generalized Gale-Shapley operator defined in Section 6.3 to
settings with indifferences. Define : X 4 X 4 by
M + , M + ,
(, , , ) = M + | ( + ) .
, M +
Claim D.3. Suppose that satisfies the irrelevance of rejected contracts condition
for all large . Let (, , , ) X 4 . If (, , , ) (, , , ), then:
(a) = + M = + M;
M + = .
= M +
= M + .
= + + + M .
44
It remains to prove Part (b). Claim D.2 and the previous paragraph yield that
( )
( ) = ( + ) = ( )
( ( ))
for all small . It follows that A ( ) = ( ) for all small ,
which implies that ( ) is an outcome. ( )
It follows from Claim D.1 that, for all small , we have ( ) = 0
whenever / ( ). The irrelevance of rejected contracts condition and Part (b)
yield that ( ) ( + ) for all large . Thus, ( ) is individually
rational.
The second claim serves as the inductive step of an argument to show that, at
fixed points of , the full mass (according to M) of any proposed contract must be
available to non-proposing counterparty.
Claim D.4. Let be a firm type, let be a set of contracts, and let
be a contract. Let (, , , ) (, , , ) and suppose that {} is rational for at
(, ) given . If satisfies the irrelevance of rejected contracts condition for all
large and ( + ) = M , then
( + ) < M = ( + ) .
Proof. Without loss of generality, assume that . We divide into cases based
on whether is a large firm or a small firm type to prove that < M .
45
( )
Because = and ( ) > 0, we have
( )
( ) < M
( + ) < M
for all . The contrapositive of Claim D.1 and the assumption that M =
( + ) together yield that
M > ( + ) = .
The cases clearly exhaust all possibilities, and so we have proved that < M .
By Claim D.3(a), it follows that
( ) = + M < .
= M + ( ) = M ,
as desired.
46
= { } and let { } = {b( ), s( )} r { }. Note that
= | and =
{ }
(2)
for all 1 .
( )
We claim that + = M for all 1 . To prove this claim, we
proceed
( by strong
) induction on . The base case of 0 is obvious. Assume that
+ = M for all 1. The inductive hypothesis and (2) yield that
( + ) = M . Claim D.4 guarantees that ( + ) = M .
(1) (1)
By (3), we have
( )
+ = ( + ) = M ,
47
y y
b =I U b f bO f
x z
x x =z
f f / b
x
1{ } , 0( )r{ } 1 , 0 r = .
( ) ( )
and
=1 =1
48
Lemma 6. Let and let be an outcome. If mass R0 is rational for
at , then set () is rational for at .
Proof. We divide into cases based on whether is a large firm or a small firm type
to prove the lemma.
( ) = ( + ) = + >
The cases clearly exhaust all possibilities, completing the proof of the claim.
Defining the preferences and the open set Because f is not substitutable in
the sale-direction, there exist a set of contracts Z f and contracts x , x f rZ
such that x / f (Z{x }) and x f (Z{x , x }). The irrelevance of rejected contracts
condition for f implies that x f (Z {x , x }). Let b = b(x ) and let b = b(x ).
Let f r {b , b , f } be arbitrarysuch a firm type exists because | | 4. Let
y b f be arbitrary, and let Z = Z {y }. Define the preferences of firm types
r {b , b , f } as follows:
( )
Case 1: large . For X , let () = Z , 0 rZ .
49
Note that the preferences defined above are substitutable, hence in particular substi-
tutable in the sale-direction.
We divide into cases based on whether b = b to define a contract z b b
as in Figure 2 on page 48.
Note that the preference of b exhibits complementarities only between x and y , and
between x and z . Since b = b(x ), it follows that the preference defined above is
substitutable in the sale-direction.
We divide into cases based on whether b = b to define the preference of b .
50
Note that the preference of b exhibits complementarities only between x and z .
Since b = b(x ), it follows that the preference defined above is substitutable in
the sale-direction. In this case, the preference of b is even fully substitutable.
/ Z {x , x , y , z }; and
(a) = 0 for all
(b) x = z .
The second claim exploits the definitions of the choice functions to show that there
are many rational deviations. When , let
51
which is positive due to the definition of .
() Z {x , x , z };
< ; and
/ {b , b } or z = for {x , x } .
Case 2: small . For this case, we divide further into cases based on whether
z ().
( ) ( )
1{ } , 0( )r{ } and 1 , 0 r = .
=1 =1
52
|| . Since is individually rational, we must have z
/ .
Moreover, we have ( ). By construction, we have
( ) ( )
1{ } , 0( )r{ } and 1 , 0 r = .
=1 =1
The cases clearly exhaust all possibilities, completing the proof of the claim.
The remaining two claims show that x > 0 and z = 0 must hold, respectively,
in any stable or seller-initiated-stable outcome. These facts will easily to seen to
imply the non-existence of stable outcomes and of seller-initiated-stable outcomes.
( ( ) )
^
Claim E.3. Suppose that . If = , is a stable or seller-
^small
initiated-stable outcome, then x = f .
Proof. We prove the contrapositive. Assume that x < f and that is individually
f
rational. Because is an outcome, there exists f such that > 0 and
/ . Claim E.1(a) implies that Z {x }. Let = min{, }. We divide into
x
cases based on whether x to prove that is not seller-initiated-stable or stable.
53
proposal sequence ((1 , 1 ) , . . . , (+1 , +1 )) blocks , so that is not seller-
initiated-stable either.
{z } if b = b
+2 =
if b = b ,
The cases clearly exhaust all possibilities, and thus we have proved the claim.
( ( ) )
^
Claim E.4. If and , is stable or seller-initiated-stable, then
^small
z = 0.
( ( ) )
^
Proof. We prove the contrapositive. Suppose that = , is an
^small
( )
individually rational outcome with z > 0 and that . Let = y , 0r{y }
where { }
= min , z , inf b .
b >0
54
Case 1: b large . Since z , we have
b (b + )y = y + y
Case 2: b small . Because z > 0, there exists b such that b > 0 and
z . We have b by construction. The individual rationality of implies
that x . As y b ( {y }), it follows that is rational for b at .
The cases clearly exhaust all possibilities, and thus is rational for b at .
The proof that is rational for f at is similar to the proof of Claim E.2. Note
that y f because is an outcome. It follows that y + y My and y + y f
if f small . To prove that is rational for f at , we divide into cases based on
whether f is a large firm or a small firm type.
The cases clearly exhaust all possibilities, completing the proof that blocks .
Clearly, z = 0 must hold in any stable outcome. Note that z = 0 must also
hold in any seller-initiated outcomeif z > 0, then the seller-initiated proposal
sequence ({y }, s(y )) blocks by Lemma 6 and the discussion of the previous two
paragraphs.
Claims E.3 and E.4 together imply that, if , then z < x in any stable
or seller-initiated-stable outcome. But Claim E.1(b) guarantees that z = x in any
individually rational outcome. Thus, no stable or seller-initiated-stable outcome can
exist when .
55
Note that since small = , outcomes are uniquely determined by their associ-
ated allocations. By abuse of notation, I identify outcomes with their associated
allocations.
b () =
{ { f ()
} }
min min { x , x } min x , x , y y
,
min max min {x , x } f ()x y , 0 + x , z z
{ { } }
56
Case 2: b = b . For Xb , let
( )
b () = ( b )b r{x ,z } , min {x , z , x }{x ,z } .
Note that b exhibits complementarities only between x and z . Since b = b(x ),
it follows that the preference defined above is substitutable in the sale-direction.
In this case, the preference of b is even fully substitutable.
(b) x = z ; and
f + f ;
57
x + x f ()x ;
z + z x ;
() f {z }; and
= b or x = z ,
The remaining two claims are analogous to Claims E.3 and E.4, respectively.
Proof. We prove the contrapositive. Assume that is individually rational and that
x x . In light of Claim E.5(a), it follows that r{y ,z }{x } r{y ,z }{x } . In
particular, we have f . Note also that z x by Claim E.5(b). We divide into
cases based on whether f = f () to prove that is not seller-initiated-stable or
stable.
and let ( )
= r{x } , (x ){x ,z } , 0r r{z } .
58
We claim that ((1 , 1 ) , . . . , (+2 , +2 )) blocks . For all 1 , the set
f
is rational for at by Claim E.6 and Lemma 6. The set f = +1
is rational for f at by Lemma 6. The set +2 is rational for +2 at given
+2
(+1) by Claim E.6 and Lemmata 5 and 6. We divide into cases to prove that
there exists 1 + 2 and such that {} is rational for b() at given
b()
(+2) .
In all cases, we have shown that there exists 1 + 2 and such that
b()
{} is rational for b() at given (+2) . Since the cases exhaust all possibilities,
((1 , 1 ) , . . . , (+2 , +2 )) blocks , so that is not seller-initiated-stable either.
and let ( )
= r{x } , (x ){x ,z } , 0r r{z } .
{z } if b = b
+2 = ,
if b = b
59
f
We claim that ((1 , 1 ) , . . . , (+2 , +2 )) blocks . The set f = +1
is rational for f at by construction. For all 1 , the set is rational
for at by Claim E.6 and Lemma 6. The set +2 is rational for +2 at
+2 b(z )
given (+1) and rational for b(z ) at given (+2) by Lemma 5. Thus,
((1 , 1 ) , . . . , (+2 , +2 )) blocks , so that is not seller-initiated-stable either.
The cases clearly exhaust all possibilities, and thus we have proved the claim.
b (b + )y = y + y
Claims E.7 and E.8 together imply that x > x z in any stable or seller-
initiated-stable outcome. But Claim E.5(b) guarantees that x = z in any indi-
vidually rational outcome . Thus, no stable or seller-initiated-stable outcome can
exist.
60
F.2 Proof of Lemmata 2 and 2
We prove the contrapositive. Suppose that outcome is not strongly tree stable.
If is not individually rational, then it is not sequentially stable. Thus, we can
assume that some tree blocks . As is a tree, there exists an ordering of firms
= {1 , . . . , } such that
r 1
<
for all 1 . Let = r < , so that ((1 , 1 ) , . . . , ( , )) is a rooted
proposal sequence. Because the firms 1 , . . . , are pairwise distinct, we have
( )
(1) = = r
<
for all 1 .
We claim ((1 , 1 ) , . . . , ( , )) blocks . Because blocks , the set is
rational for at for all 1 . Lemma 5 guarantees is rational for at
given (1) for all 1 . Let be such that = and = such
a exists because is a non-empty tree. Note that = because the firms
1 , . . . , are pairwise distinct. Let be arbitrary. Lemma 5 guarantees that
{} is rational for at given . Thus, ((1 , 1 ) , . . . , ( , )) blocks , which
implies that is not sequentially stable.
61
{} is rational for at given .
Proof. We divide into cases based on whether is a large firm or a small firm type
to prove that there exists such that is rational for at .
The cases clearly exhaust all possibilities. Lemma 5 guarantees that {} is rational
for at given for all , so that . In light of Lemma 5, it follows
that {} is rational for at given , as desired.
First, we prove that { } is rational for at given for all and
= , . This is true by assumption for = . Note that { } is rational for at
given (1) , so that { } is rational for at given by Lemma 5. Thus,
{ } is rational for at given for all and = , .
Claim F.1 guarantees { } is rational for at given for all and
= , . It follows from Lemma 5 that blocks , so that is not stable.
62
for all 1 .
We claim that ((1 , 1 ) , . . . , ( , )) blocks . Because is rational for at
for all , Lemma 5 guarantees that the set is rational for at given (1) .
Let be such that = and = such a exists because is non-empty and
acyclic. Note that = because the firms 1 , . . . , are pairwise distinct. Let
be arbitrary. Lemma 5 guarantees that {} is rational for at given .
Thus, ((1 , 1 ) , . . . , ( , )) blocks , which implies that is not seller-initiated-
stable.
Because = r r and , we have = . Note also
r r
63
The cases clearly exhaust all possibilities, which completes the proof of the lemma.
64
Case 2: = f1 . If f1 large , then let f1 be given by
( { } { } )
f1
min x1 , x + y x , min max{x1 y , 0}, x x ,
() = { } 1
f1 : {x1 , y } f1 {x1 , x } f1 .
( )
f () = y , 0f r{y }
Note that (resp. ) is substitutable in the sale-direction for all large (resp.
small ) by construction.56
The following claim shows that in any individually rational outcome, the same
quantity of each of the contracts x must be traded and y cannot be traded.
( ( ) )
^
Claim F.3. If = , is an individually rational outcome, then
^small
x1 = x2 = = x and y = 0.
Proof. To prove the first part of the claim, it suffices to show that x1 = x for all
2 . This assertion is immediate from the individual rationality of for f .
To prove the second part of the claim, note that x1 = x + y due to the
individual rationality of for f1 . Thus, the second part of the claim follows from the
first part.
56
In fact, (resp. ) is even fully substitutable for all large (resp. small ) by
construction.
65
( ( ) )
^
Let = , be any individually rational outcome. Let
^small
{ }
= min min M , inf .
>0
Note that y = 0 by Claim F.3. To prove that is blocked, we divide into cases
based on whether x1 = 0.
The cases are clearly exhaustive, and thus we have proved that is not stable. Since
was an arbitrary individually rational outcome, the economy does not have a stable
outcome.
= { | s () = }
Claim F.4. For all large , the choice function is substitutable in the sale-di-
rection. For all small , the choice function is substitutable in the sale-direction.
66
Case 1: = s . Note that s = by construction. Thus, the claim is vacuously
true for = s .
The cases clearly exhaust all possibilities, and thus we have proved the claim.
: r() .
The following claim shows that each buyer in the auxiliary economy trades the
same amount of all of its contracts in any individually rational outcome.
( ( ) )
^
Claim F.5. Let , be an individually rational outcome in the auxil-
^small
iary economy and let . We have r = r for all r , r a().
Proof. Note that r() and are the only individually rational sets of contracts for
in the auxiliary economy.
( ( ) )
^
Given an individually rational outcome , in the auxiliary econ-
^small
omy, let (( )) ( ( ) )
( )
^ ^
, = , ,
^small
^small
67
where = r for all r a(). The above formula yields a well-defined outcome by
Claim F.5. The following claim shows that blocks of ( ) induce blocks of .
Proof. We have already shown that is an outcome (by Claim F.5). The individ-
ual rationality of is immediate from the definitions of the choice functions in the
auxiliary economy.
Suppose that blocks ( ) . Let = r(). It is clear that is rational
for at for all . Note that = for r , so that in particular is
rational for at for all r . It remains to prove that is rational for at
for all .
Let be arbitrary. Let r r() be arbitrary and let = a(r ). We divide into
cases based (
on whether is )
a large firm or a small firm type to prove that < M ,
( )
^
where = , .
^small
The cases clearly exhaust all possibilities, and thus we(have proved that) < M .
( )
^
It follows that r < for all r a(), where = , . Because
^small
= and are the only individually rational sets for in the auxiliary economy,
we have () > 0, so that is rational for at (in the auxiliary economy). Since
was arbitrary, it follows that blocks .
Note that r() is a tree in the auxiliary economy whenever is a tree in the
original economy by Definitions 8 and 16. Thus, Corollaries 5 and 6 follow from
Corollaries 1 and 4 and Claim F.6.
68
F.9 Proof of Proposition 5
As in Che et al. (2013), let denote componentwise
( ( ) maximum.
)
^
We prove the contrapositive. Let = , be an outcome. If is
^small
not individually rational, then it is not stable. Thus, we can assume that there exists
large , X such that ( ),
/ ( ), and {(,)}
{( ) 0 | ( )}
for all small . Thus, blocks , which implies that is not strongly stable.
69
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