When Al makes an offer to Betty that Betty observes and rejects, Al may “lose face”. This loss of face (LoF) may cost Al utility, either directly or through reputation effects. This can lead to fewer offers and inefficiency in the context of bilateral matching problems. Thomas Gall discusses his a simple model with asymmetric information, a continuous signal of an individual’s binary type, and a linear marriage production function.
Image courtesy of interviewee. May 30, 2024