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Competitive Search Markets with Adverse Selection

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Author Info

  • Inderst, Roman

    ()
    (Sonderforschungsbereich 504)

  • Müller, Holger M.

    ()
    (Department of Economics, University of Mannheim)

Abstract

In a seminal paper, Rothschild and Stiglitz (1976) show that competitive markets with incomplete information in which firms offer contracts to screen privately informed agents may have no equilibrium. In this paper, we argue that frictions in the form of delay or congestion provide a natural solution to the nonexistence problem. To show this, we extend the concept of competitive search equilibrium by Moen (1997) to markets with incomplete information. Our main result is that a separating equilibrium always exists. In particular, the separating equilibrium cannot be broken by a profitable pooling offer as the latter attracts only the lowest types in the population due to the ensuing congestion.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 99-52.

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Length: 11 pages
Date of creation: 22 Mar 1999
Date of revision:
Handle: RePEc:xrs:sfbmaa:99-52

Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Cited by:
  1. Moen, Espen R, 2002. "Do Good Workers Hurt Bad Workers - or is it the Other Way Around?," CEPR Discussion Papers 3471, C.E.P.R. Discussion Papers.

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