Persuaded Search

Abstract

We consider a sequential search environment in which the searching agent does not observe the quality of goods. The agent can contract with a profit-maximizing principal who sells a signal about a good's quality but cannot commit to future contracts. The agent is willing to pay a high price for a more informative signal today, but an agent who anticipates high prices in the future is less likely to continue searching due to a low continuation value, thereby reducing the principal's future profits. We show that there is an essentially unique stationary equilibrium in which the principal (i) induces the socially efficient stopping rule, (ii) fully extracts the surplus generated from search, and (iii) persuades the agent against settling for marginal quality goods, thus extending the duration of rent extraction. Our results demonstrate that the principal would not gain from long-term commitment power or considering complicated, non-stationary contracts.