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Constrained Efficiency with Search and Information Frictions

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  • S. Mohammad R. Davoodalhosseini

Abstract

I characterize the constrained efficient (or planner's) allocation in a directed (competitive) search model with private information. There are sellers with private information on one side of the market and homogeneous buyers on the other side. They match bilaterally in diff erent submarkets and trade. In each submarket, there are search frictions. In the market economy, homogeneous buyers enter diff erent submarkets (i.e., post diff erent contracts) and sellers with private information direct their search toward their preferred submarket. I defi ne a planner whose objective is to maximize social welfare subject to the information and matching frictions of the environment. The planner can impose taxes and subsidies on agents that vary across submarkets while being subject to an overall budget-balance condition. I show that the planner generally achieves strictly higher welfare than the market economy. I also derive conditions under which the planner achieves the complete information allocation. I present examples in the context of financial and labor markets, explicitly solve for the efficient tax and transfer schemes and compare the planner's allocation with the equilibrium allocation.

Suggested Citation

  • S. Mohammad R. Davoodalhosseini, 2014. "Constrained Efficiency with Search and Information Frictions," 2014 Papers pda658, Job Market Papers.
  • Handle: RePEc:jmp:jm2014:pda658
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    References listed on IDEAS

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    1. Paul Milgrom & Ilya Segal, 2002. "Envelope Theorems for Arbitrary Choice Sets," Econometrica, Econometric Society, vol. 70(2), pages 583-601, March.
    2. Acemoglu, Daron & Shimer, Robert, 1999. "Holdups and Efficiency with Search Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 827-849, November.
    3. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-180, January.
    4. Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, August.
    5. Veronica Guerrieri & Robert Shimer, 2014. "Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality," American Economic Review, American Economic Association, vol. 104(7), pages 1875-1908, July.
    6. Jan Eeckhout & Philipp Kircher, 2010. "Sorting and Decentralized Price Competition," Econometrica, Econometric Society, vol. 78(2), pages 539-574, March.
    7. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    8. Delacroix, Alain & Shi, Shouyong, 2013. "Pricing and signaling with frictions," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1301-1332.
    9. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
    10. George Akerlof, 1976. "The Economics of Caste and of the Rat Race and Other Woeful Tales," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 599-617.
    11. Shouyong Shi, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 467-491.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Constrained Efficiency with Search and Information Frictions
      by Christian Zimmermann in NEP-DGE blog on 2014-12-31 21:42:17

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G1 - Financial Economics - - General Financial Markets
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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