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Search Frictions and Efficiency in Decentralized Transport Markets

Giulia Brancaccio (), Myrto Kalouptsidi (), Theodore Papageorgiou () and Nicola Rosaia ()
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Giulia Brancaccio: Cornell University
Myrto Kalouptsidi: Harvard University
Theodore Papageorgiou: Boston College
Nicola Rosaia: Harvard University

No 1010, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: In this paper we explore efficiency and optimal policy in decentralized transportation markets that suffer from search frictions, such as taxicabs, trucks and bulk shipping. We illustrate the impact of two externalities: the well-known thin/thick market externalities and what we call pooling externalities. We characterize analytically the conditions for efficiency, show how they translate into efficient pricing rules, as well as derive the optimal taxes for the case where the planner is not able to set prices. We use our theoretical results to explore welfare loss and optimal policy in dry bulk shipping. We find that the constrained efficient allocation achieves 6% welfare gains, while the first-best allocation corresponding to the frictionless world, achieves 14% welfare gains. This suggests that policy can achieve substantial gains, even if it does not alleviate search frictions, e.g. through a centralizing platform. Finally, we demonstrate that simple policies designed to mimic the optimal taxes perform well.

Keywords: search; friction; efficiency; transport; optimal policy (search for similar items in EconPapers)
JEL-codes: F1 L0 L91 R4 R48 (search for similar items in EconPapers)
Date: 2020-05-15
New Economics Papers: this item is included in nep-des, nep-ore, nep-reg and nep-tre
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