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Search costs and the severity of adverse selection

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  • Palazzo, Francesco

Abstract

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.

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  • Palazzo, Francesco, 2017. "Search costs and the severity of adverse selection," Research in Economics, Elsevier, vol. 71(1), pages 171-197.
    • Handle: RePEc:eee:reecon:v:71:y:2017:i:1:p:171-197
    DOI: 10.1016/j.rie.2016.09.001
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    2. Angelini, Francesco & Castellani, Massimiliano, 2022. "Price and information disclosure in the private art market: A signalling game," Research in Economics, Elsevier, vol. 76(1), pages 14-20.

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    More about this item

    Keywords

    Dynamic adverse selection; Decentralized markets; Search theory; Time on market observability;
    All these keywords.

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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