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Federal Reserve Bank of Philadelphia
Working Papers
Screening and Adverse Selection in Frictional Markets
Benjamin Lester
Ali Shourideh
Venky Venkateswaran
Ariel Zetlin-Jones
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.


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Benjamin Lester & Ali Shourideh & Venky Venkateswaran & Ariel Zetlin-Jones, Screening and Adverse Selection in Frictional Markets, Federal Reserve Bank of Philadelphia, Working Papers 17-35, 10 Oct 2017.
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Subject headings:
Keywords: Adverse Selection; Imperfect Competition; Screening; Transparency; Search Theory
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