Search costs and the severity of adverse selection |
| |
Affiliation: | 1. State University of New York at Buffalo, Buffalo USA;2. National Bureau of Economic Research, and Institute of Labor Economics |
| |
Abstract: | In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading. |
| |
Keywords: | Dynamic adverse selection Decentralized markets Search theory Time on market observability |
本文献已被 ScienceDirect 等数据库收录! |