IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v157y2023ics001429212300096x.html
   My bibliography  Save this article

Competitive search with two-sided risk aversion

Author

Listed:
  • Jerez, Belén

Abstract

Search theory is widely used in economics to study markets where trading frictions are prevalent. However, all existing theoretical models assume that either buyers or sellers (or both) are risk neutral, and the case where both parties are risk averse remains unexplored. This paper is a first step to fill this gap. I analyze a static competitive search model where risk-averse agents with different wealth seek to exchange an indivisible good. The housing market is an important application since a home typically represents a large part of a person’s wealth. I prove that a competitive search equilibrium is constrained efficient, and derive a generalized Hosios condition that relates the gains of the two parties in each transaction. Under risk aversion, wealthier buyers are more concerned with increasing their trading probability than with getting the best price. The opposite is true for sellers when the coefficient of absolute risk aversion is non-increasing. This results in positive sorting in equilibrium, that is, wealthier (poorer) buyers and sellers trading with each other at higher (lower) prices. This sorting mechanism offers a novel explanation for why the separation between rich and poor neighborhoods can be persistent.

Suggested Citation

  • Jerez, Belén, 2023. "Competitive search with two-sided risk aversion," European Economic Review, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:eecrev:v:157:y:2023:i:c:s001429212300096x
    DOI: 10.1016/j.euroecorev.2023.104467
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S001429212300096X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.euroecorev.2023.104467?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mayock, Tom & Malacrida, Rachel Spritzer, 2018. "Socioeconomic and racial disparities in the financial returns to homeownership," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 80-96.
    2. Menzio, Guido & Shi, Shouyong, 2010. "Block recursive equilibria for stochastic models of search on the job," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1453-1494, July.
    3. Jerez, Belén, 2014. "Competitive equilibrium with search frictions: A general equilibrium approach," Journal of Economic Theory, Elsevier, vol. 153(C), pages 252-286.
    4. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    5. Jerez, Belén, 2017. "Competitive search equilibrium with multidimensional heterogeneity and two-sided ex-ante investments," Journal of Economic Theory, Elsevier, vol. 172(C), pages 202-219.
    6. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, March.
    7. Darren K. Hayunga & Henry J. Munneke, 2021. "Examining Both Sides of the Transaction: Bargaining in the Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(2), pages 663-691, June.
    8. Elder, Harold W & Zumpano, Leonard V & Baryla, Edward A, 1999. "Buyer Search Intensity and the Role of the Residential Real Estate Broker," The Journal of Real Estate Finance and Economics, Springer, vol. 18(3), pages 351-368, May.
    9. Edward A. Baryla, Jr. & Leonard V. Zumpano & Harold W. Elder, 2000. "An Investigation of Buyer Search in the Residential Real Estate Market under Different Market Conditions," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 75-91.
    10. Pietro Garibaldi & Espen R. Moen, 2010. "Job to Job Movements in a Simple Search Model," American Economic Review, American Economic Association, vol. 100(2), pages 343-347, May.
    11. Mas-Colell, Andreu, 1975. "A model of equilibrium with differentiated commodities," Journal of Mathematical Economics, Elsevier, vol. 2(2), pages 263-295.
    12. Norman G. Miller, 1978. "Time on the Market and Selling Price," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 6(2), pages 164-174, June.
    13. Delacroix, Alain & Shi, Shouyong, 2013. "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.
    14. Shouyong Shi, 2009. "Directed Search for Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 77(2), pages 561-584, March.
    15. Antonia Díaz & Belén Jerez & Juan Pablo Rincón-Zapatero, 2023. "Housing Prices and Credit Constraints in Competitive Search," The Economic Journal, Royal Economic Society, vol. 134(657), pages 220-270.
    16. Robert R. Trippi, 1977. "Estimating the Relationship between Price and Time to Sale for Investment Property," Management Science, INFORMS, vol. 23(8), pages 838-842, April.
    17. Merlo, Antonio & Ortalo-Magne, Francois, 2004. "Bargaining over residential real estate: evidence from England," Journal of Urban Economics, Elsevier, vol. 56(2), pages 192-216, September.
    18. Jerez, Belén, 2017. "Online appendix : Competitive Search Equilibrium with Multidimensional Heterogeneity and Two-Sided Ex-ante Investments," UC3M Working papers. Economics 25364, Universidad Carlos III de Madrid. Departamento de Economía.
    19. Michael Peters, 1997. "On the Equivalence of Walrasian and Non-Walrasian Equilibria in Contract Markets: The Case of Complete Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 241-264.
    20. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    21. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
    22. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    23. Randall Wright & Philipp Kircher & Benoît Julien & Veronica Guerrieri, 2021. "Directed Search and Competitive Search Equilibrium: A Guided Tour," Journal of Economic Literature, American Economic Association, vol. 59(1), pages 90-148, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Antonia Díaz & Belén Jerez & Juan Pablo Rincón-Zapatero, 2023. "Housing Prices and Credit Constraints in Competitive Search," The Economic Journal, Royal Economic Society, vol. 134(657), pages 220-270.
    2. Jerez, Belén, 2022. "Competitive search with two-sided risk aversion," UC3M Working papers. Economics 34383, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Jerez, Belén, 2014. "Competitive equilibrium with search frictions: A general equilibrium approach," Journal of Economic Theory, Elsevier, vol. 153(C), pages 252-286.
    4. Jerez, Belén, 2017. "Competitive search equilibrium with multidimensional heterogeneity and two-sided ex-ante investments," Journal of Economic Theory, Elsevier, vol. 172(C), pages 202-219.
    5. Kircher, Philipp & Wright, Randall & Julien, Benoit & Guerrieri, Veronica, 2017. "Directed Search: A Guided Tour," CEPR Discussion Papers 12315, C.E.P.R. Discussion Papers.
    6. Rabinovich, Stanislav & Wolthoff, Ronald, 2022. "Misallocation inefficiency in partially directed search," Journal of Economic Theory, Elsevier, vol. 206(C).
    7. Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).
    8. Cai, Xiaoming & Gautier, Pieter A. & Wolthoff, Ronald P., 2017. "Search frictions, competing mechanisms and optimal market segmentation," Journal of Economic Theory, Elsevier, vol. 169(C), pages 453-473.
    9. Leo Kaas & Philipp Kircher, 2015. "Efficient Firm Dynamics in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 105(10), pages 3030-3060, October.
    10. Manolis Galenianos & Philipp Kircher, 2012. "On The Game‐Theoretic Foundations Of Competitive Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 1-21, February.
    11. Davoodalhosseini, Seyed Mohammadreza, 2019. "Constrained efficiency with adverse selection and directed search," Journal of Economic Theory, Elsevier, vol. 183(C), pages 568-593.
    12. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 813-886, Elsevier.
    13. Kawata, Keisuke & Nakajima, Kentaro & Sato, Yasuhiro, 2016. "Multi-region job search with moving costs," Regional Science and Urban Economics, Elsevier, vol. 61(C), pages 114-129.
    14. Menzio, Guido & Shi, Shouyong & Sun, Hongfei, 2013. "A monetary theory with non-degenerate distributions," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2266-2312.
    15. Mangin, Sephorah, 2017. "A theory of production, matching, and distribution," Journal of Economic Theory, Elsevier, vol. 172(C), pages 376-409.
    16. Philipp Kircher, 2009. "Efficiency of Simultaneous Search," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 861-913, October.
    17. Shi, Shouyong, 2016. "Customer relationship and sales," Journal of Economic Theory, Elsevier, vol. 166(C), pages 483-516.
    18. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, March.
    19. Francisco M. Gonzalez & Shouyong Shi, 2010. "An Equilibrium Theory of Learning, Search, and Wages," Econometrica, Econometric Society, vol. 78(2), pages 509-537, March.
    20. Fei Li & Xi Weng, 2017. "Efficient Learning And Job Turnover In The Labor Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 727-750, August.

    More about this item

    Keywords

    Competitive search; Risk aversion; Wealth heterogeneity; Constrained efficiency; Sorting;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:157:y:2023:i:c:s001429212300096x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.