1 Department of Computer Science and Information Theory, Budapest University of Technology and Economics · 2 Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences · 3 Harvard Business School · 4 Department of Economics, Harvard University · 5 Department of Mathematics, University of Hamburg · 6 Department of Operations Research and Actuarial Sciences, Corvinus University of Budapest · 7 Department of Economics, Institute for New Economic Thinking at the Oxford Martin School, St. Catherine's College, University of Oxford
Abstract
We show how frictions and continuous transfers jointly affect equilibria in a model of matching in trading networks. Our model incorporates distortionary frictions such as transaction taxes and commissions. When contracts are fully substitutable for firms, competitive equilibria exist and coincide with outcomes that satisfy a cooperative solution concept called trail stability . However, competitive equilibria are generally neither stable nor Pareto‐efficient.