Screening and Adverse Selection in Frictional Markets

Abstract

We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium, and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show how the structure of equilibrium contracts-and hence the relationship between an agent's type, the quantity he trades, and the corresponding price-is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. We also show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences.

A Bayesian approach to investment in innovation projects with the presence of fake innovators

“…In some works, a regulatory signaling analysis is carried out ( Licari and Meier, 2000 ; Austen-Smith and Fryer, 2005 ; Pecorino and Van Boening, 2018 ). The concept and methods of screening in the conditions of asymmetric information, including exclusive and competitive screening, have been developed ( Riley, 2001 ; Strausz, 2017 ; Lester et al., 2019 ). Signaling mechanisms are widely used in nowadays economy, particularly in labor markets, commodity markets, as well as signaling in economic policy.…”

“…It should be noted that a similar approach, taking into account the possibility of deceptive behavior and distinguish it from pure uncertainty, is present in some recent works about bargaining ( Kim, 2019 ). Unlike game models of the market with information asymmetry ( Akerlof, 1970 ; Netzer and Scheuer, 2012 ; Pecorino and Van Boening, 2018 ; Lester et al., 2019 ), we assume multi-period bargaining game with the Bayesian adjustment of subjective assessments.…”

Directed Search and Competitive Search Equilibrium: A Guided Tour

“…However, to ensure simple price posting is optimal for any distribution of buyer types we need bilateral meetings-see Wolthoff (2017, 2019), who also show it is optimal for a seller that attracts n to post auctions with a reserve price equal to cost and an entry fee τ . One can show τ = 0 if ζ 2 = 0 everywhere, a feature called invariance (Lester et al 2019). When this applies, it is optimal to pool, as competition between types is handled by the mechanism rather than meetings.…”

Search, Information, and Prices

“…More generally, Theorem 1 can be adapted to other settings when firms compete by demanding a certain level of profit and a consumer accepts the contract offering the most surplus. For example, Lester et al (2019) consider a setting where firms offer menus of price-quantity pairs to a consumer of unknown type, but the consumer's preferences are "rank-preserving" in equilibrium, so the preferred contract is the same for all consumers. Lester et al (2019) analyze what happens for a given price count distribution and no infor-mation, while Theorem 1 could be used to identify the highest distribution of profits across information structures.…”