Competition in Optimal Stopping : Behavioral Insights

Problem definition: We study settings in which a clearinghouse organizes a market where agents sequentially search among different options under competition. We focus on the effect of two market design choices that are motivated in the context of kidney transplants: (i) transparency, i.e., whether agents know their priority relative to the other agents searching; and (ii) the mechanism to collect decisions, i.e., whether all agents make their decisions simultaneously or sequentially. Methodologies/results: We introduce a model of sequential search under competition, whereby agents are exogenously prioritized and must decide when to stop their search to maximize the chosen option's value. For each configuration, we characterize the optimal policy, which defines a sequence of thresholds that determine when each agent should accept an option depending on the information available. We find that, although the mechanism does not affect the optimal policy, providing information about agents' priorities reduces the overall welfare and fairness. We design and conduct a lab experiment that replicates our theoretical model to test these predictions. We find that agents significantly deviate from their corresponding optimal policies. Moreover, we find that the mechanism has a significant effect on their decisions, due primarily to two drivers: (i) saliency of competition and (ii) frustration. Finally, we find that the benefits of opaqueness do not translate to practice, mainly because agents do not incorporate relevant information about the amount of competition.Managerial implications: Our results show that the mechanism to collect agents’ decisions matters, as it may affect the saliency of competition and induce frustration. Moreover, our results show that welfare and fairness could increase if agents have only partial information about their ranking, but these benefits do not translate to practice due to information friction.Thus, clearinghouses should accompany these changes with information policies and guidance to alleviate these effects