Screening and Adverse Selection in Frictional Markets

90 Pages Posted: 18 Oct 2017

See all articles by Benjamin R. Lester

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Ariel Zetlin-Jones

Carnegie Mellon University; Federal Reserve Bank of Minneapolis

Date Written: October, 2017

Abstract

We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium, and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent?s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market structure. We also show that increasing competition and reducing informational asymmetries can decrease welfare.

Keywords: Adverse Selection, Imperfect Competition, Screening, Transparency, Search Theory

JEL Classification: D41, D42, D43, D82, D83, D86, L13

Suggested Citation

Lester, Benjamin R. and Venkateswaran, Venky and Venkateswaran, Venky and Zetlin-Jones, Ariel, Screening and Adverse Selection in Frictional Markets (October, 2017). FRB of Philadelphia Working Paper No. 17-35, Available at SSRN: https://ssrn.com/abstract=3051063

Benjamin R. Lester (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Ariel Zetlin-Jones

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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