Working Paper: CEPR ID: DP16871
Authors: Sarah Auster; Piero Gottardi; Ronald Wolthoff
Abstract: We study the effect of diminishing search frictions in markets with adverse selection by presenting a model in which agents with private information can simultaneously contact multiple trading partners. We highlight a new trade-off: facilitating contacts reduces coordination frictions but also the ability to screen agents' types. We find that, when agents can contact sufficiently many trading partners, fully separating equilibria obtain only if adverse selection is sufficiently severe. When this condition fails, equilibria feature partial pooling and multiple equilibria co-exist. In the limit, as the number of contacts becomes large, some of the equilibria converge to the competitive outcomes of Akerlof (1970), including Pareto dominated ones; other pooling equilibria continue to feature frictional trade in the limit, where entry is inefficiently high. Our findings provide a basis to assess the effects of recent technological innovations which have made meetings easier.
Keywords: adverse selection; multiple applications; directed search
JEL Codes: D82; D83; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| diminishing search frictions in markets with adverse selection (D82) | tradeoff: facilitating contacts reduces coordination frictions but diminishes the ability to screen agents' types (D82) |
| severity of adverse selection (D82) | type of equilibria that can exist (C62) |
| number of contacts increases (D85) | probability of hiring high-type workers converges to zero (J69) |
| facilitating contacts (F55) | low-type workers always gain (J79) |
| facilitating contacts (F55) | high-type workers may lose (J62) |