Econometrica: Jan 2016, Volume 84, Issue 1

Search with Adverse Selection

https://doi.org/10.3982/ECTA9969
p. 243-315

Stephan Lauermann, Asher Wolinsky

This paper analyzes a sequential search model with adverse selection. We study information aggregation by the price—how close the equilibrium prices are to the full‐information prices—when search frictions are small. We identify circumstances under which prices fail to aggregate information well even when search frictions are small. We trace this to a strong form of the winner's curse that is present in the sequential search model. The failure of information aggregation may result in inefficient allocations.

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