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Reputational Concerns in Directed Search Markets with Adverse Selection

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  • Elton Dusha

Abstract

This paper introduces reputation building in directed search with adverse selection. Seller types randomly determine the quality of the asset they hold, where both a seller's type and asset quality are private information. When an exchange occurs, the quality of the asset that a seller holds is revealed and the market updates its belief about a seller's type, which I refer to as reputation. Markets where sellers have a higher reputation have lower liquidity and higher prices. With reputational concerns, the downward liquidity distortions caused by adverse selection are exacerbated. Equilibrium selection is affected by the incentives sellers have to earn a higher reputation. Shocks to entry costs have larger effects when sellers can build a reputation through multiple matches with buyers. JEL classiffications: D82,G1. Key words: Keywords: directed search, adverse selection, reputation, liquidity.

Suggested Citation

  • Elton Dusha, 2015. "Reputational Concerns in Directed Search Markets with Adverse Selection," Documentos de Trabajo 318, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:318
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    References listed on IDEAS

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    1. Eduardo Engel & Ronald Fischer & Alexander Galetovic & Manuel Hermosilla, 2009. "Renegociación de concesiones en Chile," Documentos de Trabajo 262, Centro de Economía Aplicada, Universidad de Chile.
    2. Mizala, Alejandra & Romaguera, Pilar & Gallegos, Sebastián, 2011. "Public–private wage gap in Latin America (1992–2007): A matching approach," Labour Economics, Elsevier, vol. 18(S1), pages 115-131.
    3. Bernardo Lara & Alejandra Mizala & Andrea Repetto, 2009. "The Effectiveness of Private Voucher Education: Evidence from Structural School Switches," Documentos de Trabajo 263, Centro de Economía Aplicada, Universidad de Chile.
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    More about this item

    Keywords

    keywords: directed search; adverse selection; reputation; liquidity.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G1 - Financial Economics - - General Financial Markets

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