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Assistant Professor |
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Stephan Lauermann |
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This paper looks at a model of search with adverse selection. An agent that we call the buyer samples sequentially alternative trading partners, sellers, for a transaction that involves information asymmetry. To have a story in mind, one can think of the buyer as someone who is applying for credit and who is seeking offers from potential lenders. The existence of good and bad creditors turns this into a setting with adverse selection. The main objective of this paper is to understand how the combination of search activity and adverse selection affects prices and welfare. |
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Search with Adverse Selection |
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Research |
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In this paper we reexamine the strategic foundations of competitive equilibria. We do so in the context of a dynamic matching and bargaining model with a time invariant inflow of new traders. We endorse the view expressed in Gale (2000, p.3) that a strategic foundation should investigate a model in which all endogenous variables are determined by choices of the agents in the model and any feasible profiles of strategies chosen by the agents determines a unique feasible outcome. As in Gale (1987, section 6) and most of the literature building on his contribution, we restrict attention to stationary strategy profiles and identify outcomes with steady-states. We contend that the steady state model in Gale (1987) does not provide strategic foundations for competitive equilibria in this sense and propose a simple modification aimed to rectify this problem. |
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Linking Stocks to Flows by Strategies: On the Strategic Foundations of Competitive Equilibria |
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Abstract to be posted. |
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Aggregate uncertainty and learning in a search model (joint with Wolfram Merzyn and Gabor Virag) |
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Dynamic matching and bargaining games provide models of decentralized markets with trading frictions. A central objective of the literature is to investigate how equilibrium outcomes depend on the level of the frictions. In particular, does the trading outcome become Walrasian (market clearing) when frictions become small? Existing specifications of such games provide divergent answers. To investigate what causes these differences, four conditions on trading outcomes are identified. These conditions are shown to be necessary and sufficient for the equilibrium outcomes of any game to become Walrasian when frictions are small. A parameterized example shows how the result can be used to understand the structural properties that drive or inhibit convergence to the Walrasian outcome in a variety of economic settings. Former Version (November 2006). This version includes an extension to settings with costly entry and infinitely lived agents. |
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I consider a simple bilateral trading game between a seller and a buyer who have private valuations for an indivisible good. The seller makes a price offer which the buyer can either accept or reject. If the seller can observe the valuation of the buyer (if information is symmetric), then the trading outcome is trivially efficient. If the seller cannot observe the valuation (if information is asymmetric), then the outcome must be inefficient, as is known from the Myerson-Satterthwaite Impossibility Theorem. This bilateral trading game between a single buyer and a single seller is embedded into a matching market with a continuum of traders. I show that in this market the relation between information and efficiency is reversed. In particular, if information is symmetric, trading in the market is, in fact, inefficient. Thus, in markets, private information has a surprising, efficiency enhancing role.
Former Version: When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets |
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This paper studies a decentralized, dynamic matching and bargaining market: buyers and sellers are matched into pairs. Traders exit the market at a constant rate, inducing search costs (frictions). All price offers are made by sellers. Despite the fact that sellers have all the bargaining power we show that they set competitive prices in the limit when frictions become small. Previous literature has restricted the sellers' bargaining power. We dispense with this restriction and show that the convergence result does not depend on the distribution of bargaining power. Our model allows us to isolate basic market clearing forces that ensure the competitive outcome in the frictionless limit. For the particular case of homogeneous sellers we characterize the equilibrium price by the familiar Lerner formula. We use this formula to provide comparative static results of the decentralized trading outcome with respect to the level of the search frictions. |
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Price Setting in a Decentralized Market and the Competitive Outcome (MPI Collective Goods Preprint, No. 6, 2008) |