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Adverse Selection in Competitive Search Equilibrium

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  • Veronica Guerrieri
  • Robert Shimer
  • Randall Wright

Abstract

We extend the notion of competitive search equilibrium to an environment with adverse selection. Uninformed principals post contracts to attract informed agents. Agents observe the contracts and apply for one, trading off the probability of matching with a principal against the terms of trade offered by the contract. We characterize equilibria as the solution to a constrained optimization problem and show that in equilibrium principals offers separating contracts to attract different types of agents. We then present a set of examples, including a workplace rat race, insurance against layoff risk, and lemons in asset markets, to illustrate the usefulness of our model.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 78 (2010)
Issue (Month): 6 (November)
Pages: 1823-1862

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Handle: RePEc:ecm:emetrp:v:78:y:2010:i:6:p:1823-1862

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References

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  1. Alain Delacroix & Shouyong Shi, 2012. "Pricing and Signaling with Frictions," Working Papers tecipa-455, University of Toronto, Department of Economics.
  2. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  3. Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 485-516, June.
  4. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
  5. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  6. Moen, Espen R & Rosen, Asa, 2006. "Incentives in Competitive Search Equilibrium and Wage Rigidity," CEPR Discussion Papers 5554, C.E.P.R. Discussion Papers.
  7. Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, 08.
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