Matching with Externalities

We incorporate externalities into the stable matching theory of two-sided markets: We establish the existence of stable matchings provided that externalities are positive and agents’ choices satisfy substitutability, and we show that the standard insights of matching theory, such as the existence of side optimal stable matchings and the rural hospitals theorem, remain valid despite the presence of externalities even though the standard fixedpoint techniques do not apply. Furthermore, we establish novel comparative statics on externalities.