NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Adverse Selection in Competitive Search Equilibrium

Veronica Guerrieri, Robert Shimer, Randall Wright

NBER Working Paper No. 14915
Issued in April 2009
NBER Program(s):   EFG   LS

We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection. Principals (e.g. employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms. Agents (e.g. workers, or asset holders) have private information about the potential gains from trade. Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions. We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents. We then present a series of applications, including models of signaling, insurance, and lemons. These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.

download in pdf format
   (292 K)

email paper

This paper is available as PDF (292 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14915

Published: Veronica Guerrieri & Robert Shimer & Randall Wright, 2010. "Adverse Selection in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 78(6), pages 1823-1862, November.

Users who downloaded this paper also downloaded these:
Rogerson and Shimer w15901 Search in Macroeconomic Models of the Labor Market
Shimer w13421 Reassessing the Ins and Outs of Unemployment
Philippon and Skreta w15785 Optimal Interventions in Markets with Adverse Selection
Alvarez and Shimer w13772 Search and Rest Unemployment
Shimer and Werning w12618 Reservation Wages and Unemployment Insurance
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us