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Sorting Versus Screening in Decentralized Markets With Adverse Selection

Author

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  • Sarah Auster

  • Piero Gottardi

Abstract

We study the role of traders' meeting capacities in decentralized markets with adverse selection. Uninformed customers choose trading mechanisms in order to find a provider for a service. Providers are privately informed about their quality and aim to match with one of the customers. We consider a rich set of meeting technologies and characterize the properties of the equilibrium allocations for each of them. In equilibrium, different provider types can be separated either via sorting---they self-select into different submarkets---or screening within the trading mechanism, or a combination of the two. We show that, as the meeting technology improves, the equilibrium features more screening and less sorting. Interestingly, this reduces both the average quality of trade as well as the total level of trade in the economy. The trading losses are, however, compensated by savings in entry costs, so that welfare increases.

Suggested Citation

  • Sarah Auster & Piero Gottardi, 2022. "Sorting Versus Screening in Decentralized Markets With Adverse Selection," CRC TR 224 Discussion Paper Series crctr224_2022_362, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2022_362
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp362
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    Cited by:

    1. Francesco Del Prato & Paolo Zacchia, 2025. "Gatekeeping, Selection, and Welfare," Papers 2505.24460, arXiv.org, revised Feb 2026.
    2. Sarah Auster & Piero Gottardi & Ronald Wolthoff, 2025. "Simultaneous Search and Adverse Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 92(6), pages 3541-3573.

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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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