Competitive Search Markets with Adverse Selection

Roman Inderst and Holger M. Müller ()
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Holger M. Müller: Department of Economics, University of Mannheim, Postal: A5, Room A237, 68131 Mannheim, Germany

No 99-52, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: In a seminal paper, Rothschild and Stiglitz (1976) show that competitive markets with incomplete information in which firms offer contracts to screen privately informed agents may have no equilibrium. In this paper, we argue that frictions in the form of delay or congestion provide a natural solution to the nonexistence problem. To show this, we extend the concept of competitive search equilibrium by Moen (1997) to markets with incomplete information. Our main result is that a separating equilibrium always exists. In particular, the separating equilibrium cannot be broken by a profitable pooling offer as the latter attracts only the lowest types in the population due to the ensuing congestion.

Pages: 11 pages
Date: 1999-03-22
New Economics Papers: this item is included in nep-ind and nep-mic
Note: Financial Support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Citations: View citations in EconPapers (5)

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Working Paper: Competitive search markets with adverse selection (1999)
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