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Adverse Selection in Competitive Search Equilibrium

  • Robert Shimer

    (University of Chicago)

  • Randall Wright

    (University of Pennsylvania)

  • Veronica Guerrieri

    (University of Chicago)

We extend the notion of competitive search equilibrium to an environment with adverse selection. Uninformed principals post contracts to attract informed agents. Agents observe the contracts and apply for one, trading off the probability of matching with a principal against the terms of trade offered by the contract. We characterize equilibria as the solution to a constrained optimization problem and show that in equilibrium principals offers separating contracts to attract different types of agents. We then present a set of examples, including a workplace rat race, insurance against layoff risk, and lemons in asset markets, to illustrate the usefulness of our model.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 139.

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Date of creation: 2009
Date of revision:
Handle: RePEc:red:sed009:139
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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  1. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
  2. Veronica Guerrieri, 2008. "Inefficient Unemployment Dynamics under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 116(4), pages 667-708, 08.
  3. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  4. 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.
  5. Ed Nosal & Neil Wallace, 2004. "A model of (the threat of) counterfeiting," Working Paper 0401, Federal Reserve Bank of Cleveland.
  6. Faig, Miquel & Jerez, Belen, 2005. "A theory of commerce," Journal of Economic Theory, Elsevier, vol. 122(1), pages 60-99, May.
  7. Moen, Espen R & Rosén, Åsa, 2006. "Incentives in Competitive Search Equilibrium and Wage Rigidity," CEPR Discussion Papers 5554, C.E.P.R. Discussion Papers.
  8. 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.
  9. Alain Delacroix & Shouyong Shi, 2007. "Pricing and Signaling with Frictions," Working Papers tecipa-298, University of Toronto, Department of Economics.
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