Screening and adverse selection in frictional markets

Benjamin Lester, Ali Shourideh, Venky Venkateswaran and Ariel Zetlin-Jones

No 16-10, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. On the positive side, we show how the structure of equilibrium contracts?and, hence, the relationship between an agent?s type, the quantity he trades, and the corresponding price?is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. On the normative side, we show that increasing competition and reducing informational asymmetries can be detrimental to welfare. This suggests that recent attempts to increase competition and reduce opacity in markets that suffer from adverse selection could potentially have negative, unforeseen consequences

Keywords: Adverse selection; Imperfect competition; Screening; Transparency; Search theory (search for similar items in EconPapers)
JEL-codes: D41 D42 D43 D82 D83 D86 L13 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2016-03-10
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Screening and Adverse Selection in Frictional Markets (2019)
Working Paper: Screening and Adverse Selection in Frictional Markets (2017)
Working Paper: Screening and Adverse Selection in Frictional Markets (2016)
Working Paper: Screening and Adverse Selection in Frictional Markets (2015)
Working Paper: Screening and Adverse Selection in Frictional Markets (2015)
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