Losing Face

When person A takes an action that can be interpreted as “making an offer” to person B and B “rejects the offer,” then A may “lose face.” This loss of face (LoF) and consequent disutility will occur only if these actions are common knowledge to A and B. While under some circumstances this LoF can be rationalized by the consequences for future reputation, we claim it also enters directly into the utility function. LoF concerns can lead to fewer offers and inefficiency in markets that involve matching, discrete transactions, and offers/proposals in both directions. This pertains to the marriage market, certain types of labor markets, admissions to colleges and universities, and certain types of joint ventures and collaborations. We offer a simple model of this, and show that under some circumstances welfare can be improved by a mechanism that only reveals offers when both parties say “yes.”