Competitive search markets with adverse selection

Inderst, Roman ; Müller, Holger M.

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URN: urn:nbn:de:bsz:180-madoc-28531
Document Type: Working paper
Year of publication: 1999
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: D82 D83 ,
Subject headings (SWD): Wettbewerb , Allgemeines Gleichgewicht
Keywords (English): Competititve search markets , screening
Abstract: In a seminal paper, Rothschild and Stiglitz (1976) show that competitive markets with incomplete information in which firms offer contracts to screen privately informed agents may have no equilibrium. In this paper, we argue that frictions in the form of delay or congestion provide a natural solution to the nonexistence problem. To show this, we extend the concept of competitive search equilibrium by Moen (1997) to markets with incomplete information. Our main result is that a separating equilibrium always exists. In particular, the separating equilibrium cannot be broken by a profitable pooling offer as the latter attracts only the lowest types in the population due to the ensuing congestion.
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