Aftermarket Frictions and the Cost of Off-Platform Options in Centralized Assignment Mechanisms

Abstract

In many settings, market designers must contend with the presence of firms who participate in the broader game surrounding a market but do not participate in the portion under the designer’s control. In this paper, we study the empirical relevance of the configuration of on- and off-platform options in the context of a centralized college-major choice system. We quantify significant negative externalities generated by off-platform options and measure the aftermarket frictions that contribute to generating them in practice. Our empirical application uses administrative data from the centralized assignment system for higher education in Chile and leverages a recent policy change that increased the number of on-platform slots by approximately 40%. We first present a policy analysis which shows that expanding the centralized platform leads students to start college sooner and raises the share of students who graduate within six years. We develop an empirical model of college applications, after market waitlists, and matriculation choices. We estimate the model using students’ ranked-ordered applications, on- and off-platform enrollment, and on-time graduation outcomes. We use the estimated model to quantify welfare impacts, decompose different mechanisms and to conduct counterfactual exercises. We find that when more programs are available on the centralized platform, welfare increases substantially. These externalities are driven by students who receive and decline on-platform offers, and are amplified by substantial frictions in waitlists. Our results indicate that expanding the scope of a higher education platform can have real impacts on welfare and human capital. Importantly, the effects are larger for students from lower SES backgrounds, suggesting the design of platforms can have effects on both efficiency and equity.