Costly Search with Adverse Selection: Solicitation Curse vs. Accelerating Blessing

Marilyn Pease and Kyungmin Kim
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Marilyn Pease: University of Iowa
Kyungmin Kim: University of Iowa

No 816, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We study the effects of endogenizing search intensity in sequential search models of trading under adverse selection. Ceteris paribus, the low-type seller obtains more surplus from search and, therefore, searches more intensively than the high-type seller. This has two ramifications for trade. On the one hand, a seller who successfully finds a buyer is more likely to be the low type (solicitation curse). On the other hand, since the low-type seller leaves the market even faster than the high-type seller, a seller who is available is more likely to be the high type (accelerating blessing). We explore the interaction of these two effects in both stationary and non-stationary sequential search environments. In the stationary case, the two effects are balanced, while in the non-stationary case, the relative strengths of the two effects vary over time. We show that reducing search costs can be detrimental to the seller.

Date: 2014
New Economics Papers: this item is included in nep-com and nep-dge
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