We are grateful for comments from Daron Acemoglu, Hector Chade, Guido Lorenzoni, Giuseppe Moscarini, Iván Werning, Martin Gervais, Miguel Faig, numerous seminar participants, three anonymous referees, and a co-editor. Shimer and Wright thank the National Science Foundation for research support. Wright is also grateful for support from the Ray Zemon Chair in Liquid Assets. Guerrieri is grateful for the hospitality of the Federal Reserve Bank of Minneapolis.
Adverse Selection in Competitive Search Equilibrium
Article first published online: 3 DEC 2010
© 2010 The Econometric Society
Volume 78, Issue 6, pages 1823–1862, November 2010
How to Cite
Guerrieri, V., Shimer, R. and Wright, R. (2010), Adverse Selection in Competitive Search Equilibrium. Econometrica, 78: 1823–1862. doi: 10.3982/ECTA8535
- Issue published online: 3 DEC 2010
- Article first published online: 3 DEC 2010
- Manuscript received April, 2009; final revision received May, 2010.
- adverse selection;
We study economies with adverse selection, plus the frictions in competitive search theory. With competitive search, principals post terms of trade (contracts), then agents choose where to apply, and they match bilaterally. Search allows us to analyze the effects of private information on both the intensive and extensive margins (the terms and probability of trade). There always exists a separating equilibrium where each type applies to a different contract. The equilibrium is unique in terms of payoffs. It is not generally efficient. We provide an algorithm for constructing equilibrium. Three applications illustrate the usefulness of the approach, and contrast our results with those in standard contract and search theory.