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Search, Adverse Selection, And Market Clearing

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  • In‐Koo Cho
  • Akihiko Matsui

Abstract

We examine a dynamic decentralized trading model with infinitesimal sellers and buyers to investigate whether or not the market fails to clear in the limit of search friction vanishing. A seller, who has private information about product quality, and a buyer are matched to bargain over price. They form a long‐term relationship if they reach agreement. They return to the matching pool if they fail to agree or the existing relationship is dissolved. The market fails to clear if and only if the ratio of agents' patience over the dissolution rate exceeds a threshold.

Suggested Citation

  • In‐Koo Cho & Akihiko Matsui, 2018. "Search, Adverse Selection, And Market Clearing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1437-1467, August.
  • Handle: RePEc:wly:iecrev:v:59:y:2018:i:3:p:1437-1467
    DOI: 10.1111/iere.12309
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