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Sorting versus Screening in Decentralized Markets with Adverse Selection

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  • Gottardi, Piero
  • Auster, Sarah

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

  • Gottardi, Piero & Auster, Sarah, 2022. "Sorting versus Screening in Decentralized Markets with Adverse Selection," CEPR Discussion Papers 17575, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17575
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    References listed on IDEAS

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    1. Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(2), pages 229-255.
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    Cited by:

    1. Sarah Auster & Piero Gottardi & Ronald Wolthoff, 2022. "Simultaneous Search and Adverse Selection," Working Papers tecipa-734, University of Toronto, Department of Economics.

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    More about this item

    Keywords

    Meeting technology; mechanisms; decentralized markets;
    All these keywords.

    JEL classification:

    • 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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