Random Versus Directed Search for Scarce Resources

Abstract

This paper studies how different search protocols affect social welfare in a search market with scarcity. Agents search for objects that differ in quality either through a random or a directed search protocol. Random search protocol, in which agents are randomly paired to an object of any quality, gives rise to adversely selected markets. Directed search protocol, in which agents choose with which quality types to pair, gives rise to congestion. When utility is either non-transferable or transferable through Nash bargaining, I show that random search dominates directed search in terms of welfare, even though each agent would prefer to be able to direct her search.