TY  - JOUR
AU  - Guerrieri,Veronica
AU  - Shimer,Robert
AU  - Wright,Randall
TI  - Adverse Selection in Competitive Search Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14915
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14915
L1  - http://www.nber.org/papers/w14915.pdf
N1  - Author contact info:
Veronica Guerrieri
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/834-7834
Fax: 773/702-0458
E-Mail: vguerrie@chicagobooth.edu

Robert Shimer
Department of Economics
University of Chicago
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-9015
E-Mail: shimer@uchicago.edu

Randall Wright
Department of Finance and Department of Economics
University of Wisconsin - Madison
Grainger Hall
975 University Ave
Madison, WI 53706
E-Mail: rwright@bus.wisc.edu
AB  - 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.
ER  -