Constrained efficiency with adverse selection and directed search
S. Mohammad R. Davoodalhosseini
Journal of Economic Theory, 2019, vol. 183, issue C, 568-593
Abstract:
This paper studies constrained efficiency in Guerrieri et al.'s (2010) model of adverse selection and directed search. Buyers post contracts, and sellers with private information about their type direct their search toward their preferred contract. Buyers and sellers then match bilaterally and trade. If the Guerrieri-Shimer-Wright equilibrium fails to achieve the first best, then the planner subject to the frictions of the environment achieves strictly higher welfare than the equilibrium, i.e., the equilibrium is not ex-ante constrained efficient. Under certain conditions, the planner achieves an allocation that even Pareto dominates the equilibrium, i.e., the equilibrium is not interim constrained efficient. Under other conditions, the planner can completely undo the effects of adverse selection and achieves the first best. Cross-subsidization is the key to these results.
Keywords: Adverse selection; Directed search; Constrained efficiency; Cross-subsidization; Optimal taxation (search for similar items in EconPapers)
JEL-codes: D82 D83 E24 G10 J31 J64 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053119300705
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Constrained Efficiency with Adverse Selection and Directed Search (2017) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:183:y:2019:i:c:p:568-593
DOI: 10.1016/j.jet.2019.07.005
Access Statistics for this article
Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell
More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().