Search costs and the severity of adverse selection

Francesco Palazzo

No 1073, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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 instead search costs are not negligible and buyers receive sufficiently precise signals, sellers’ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can avoid to exacerbate 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 (search for similar items in EconPapers)
JEL-codes: D47 D82 D83 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-com, nep-dge and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Search costs and the severity of adverse selection (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1073_16

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