Adverse Selection in Competitive Search Equilibrium
We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection. Principals (e.g. employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms. Agents (e.g. workers, or asset holders) have private information about the potential gains from trade. Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions. We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents. We then present a series of applications, including models of signaling, insurance, and lemons. These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.
|Date of creation:||Apr 2009|
|Date of revision:|
|Publication status:||published as Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ed Nosal & Neil Wallace, 2004.
"A model of (the threat of) counterfeiting,"
0401, Federal Reserve Bank of Cleveland.
- Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
- Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, 08.
- Alberto Bisin & Piero Gottardi, 2005.
"Efficient Competitive Equilibria with Adverse Selection,"
CESifo Working Paper Series
1504, CESifo Group Munich.
- Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 485-516, June.
- Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
- Alain Delacroix & Shouyong Shi, 2007.
"Pricing and Signaling with Frictions,"
tecipa-298, University of Toronto, Department of Economics.
- Inderst, Roman & Wambach, Achim, 2001.
"Competitive insurance markets under adverse selection and capacity constraints,"
European Economic Review,
Elsevier, vol. 45(10), pages 1981-1992, December.
- Inderst, Roman & Wambach, Achim, 1999. "Competitive Insurance Markets Under Adverse Selection and Capacity Constraints," CEPR Discussion Papers 2269, C.E.P.R. Discussion Papers.
- Moen, Espen R, 1997.
"Competitive Search Equilibrium,"
Journal of Political Economy,
University of Chicago Press, vol. 105(2), pages 385-411, April.
- Moen, Espen R & Rosén, Åsa, 2006. "Incentives in Competitive Search Equilibrium and Wage Rigidity," CEPR Discussion Papers 5554, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14915. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.