We study two-sided markets with heterogeneous, privately informed agents who gain from being matched with better partners from the other side. Agents are matched through an intermediary. Our main results quantify the relative attractiveness of a coarse matching scheme consisting of two classes...

The paper offers a new theoretical framework to examine the role of intermediaries between creators and users of new inventions. We find that uncertainty about the profitability of investing in new inventions generates a basis for intermediation. An intermediary may provide an opportunity to...

The Ellsberg experiments provide an intuitive illustration that the Savage approach, which reduces subjective uncertainty to risk, is not rich enough to capture many decision makers' preferences. Recent experimental evidence suggests that decision makers reduce uncertainty to compound risk. This...

actions of heterogeneously informed agents.

We propose a new theory of suboptimal risk-taking based on contractual externalities. We examine an industry with a continuum of firms. Each firm's manager exerts costly hidden effort The productivity of effort is subject to systematic shocks. Firms' stock prices reflect their performance...