Screening and Adverse Selection in Frictional Markets
Abstract: We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium, and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent?s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market structure. We also show that increasing competition and reducing informational asymmetries can decrease welfare.
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2017/wp17-35.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 2017-10-10
Pages: 90 pages