A Theory of Commerce: Competitive Search Under Private Information

Miquel Faig and Belén Jerez

Working Papers from University of Toronto, Department of Economics

Abstract: We extend the concept of competitive search to an environment where, as is often common, sellers cannot observe the willingness to pay of their clients. This theoretical contribution is applied to model retail trade. We find that in equilibrium the ratio of buyers over sellers exceeds that of the first best allocation. However, a planner who faces the same informational constraints as the market and whose only policy instrument is to regulate market prices cannot improve upon the equilibrium allocation when the production technology is linear. The model we construct is quite tractable, and when inserted in a Neoclassical growth framework it is suciently rich to be taken to the data for estimation. The search parameters can be identified with data on commercial margins and the households' allocation of time.

Pages: 43 pages
Date: 2003-03-20
New Economics Papers: this item is included in nep-mic
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