Directed Search and Competitive Search Equilibrium: A Guided Tour

Abstract

This essay surveys the literature on directed search and competitive search equilibrium, covering theory and a variety of applications. These models share features with traditional search theory, but also differ in important ways. They share features with general equilibrium theory, but with explicit frictions. Equilibria are often efficient, mainly because markets price goods plus the time required to get them. The approach is tractable and arguably realistic. Results are presented for finite and continuum economies. Private information and sorting with heterogeneity are analyzed. While emphasizing issues and applications, we also provide several hard-to-find technical results. (JEL D50, D83)

Intermediation in over-the-counter markets with price transparency

“…We follow the formalization of Acemoglu and Shimer (1999) and Eeckhout and Kircher (2010a) in which sellers post terms of trade and buyers self-select to different submarkets. These are all equivalent interpretations of the competitive search protocol; see Wright et al (2019).…”

“…Within that strand of literature, the most closely related papers to ours are the ones which feature two-sided heterogeneity such as Shi (2001), Shimer (2005, Kircher (2010a), andJerez (2014). Competitive search has been widely used in many applications, comprehensively surveyed in Wright et al (2019). However, there are relatively few applications of competitive search in the context of OTC markets.…”

“…This is because when sellers post prices, they face a trade-off between posting high prices which attract orders at a low arrival rate, or posting low prices which attract orders at a high arrival rate. This is a classic trade off found in competitive search models; see Wright et al (2019) for a comprehensive review.…”

Intermediation in a directed search model

“…In contrast, in directed search models, like, ours, intermediaries are easy to find, and their prices crucially matter for the agents' decisions to contact intermediaries and to trade. As is common to all search models, the probability of trade also matters for the allocation of goods; thus in a competitive search equilibrium goods are allocated both by the prices and trading probabilities (see Wright et al, 2019, for a survey of directed and competitive search). Watanabe (2010) considers intermediaries in a directed search model like we.…”

Exponential Income Distribution and Evolution of Unemployment Compensation in the United Kingdom

“…In the literature documenting search models, the unemployment compensation is a wellknown central variable. There is a rich strand of literature dealing with this topic (Moen, 1997;Smith, 1999;Giuseppe and Postel-Vinay, 2013;Kaas and Kircher, 2015;Jerez, 2017;Wright et al, 2019). As our model provides a linear function relationship between and , this potentially bridges the search model and the ADE.…”