Search, Adverse Selection, and Market Clearing

31 Pages Posted: 20 Aug 2018

See all articles by In-Koo Cho

In-Koo Cho

University of Illinois at Urbana-Champaign

Akihiko Matsui

University of Tokyo - Faculty of Economics

Date Written: August 2018

Abstract

We examine a dynamic decentralized trading model with infinitesimal sellers and buyers to investigate whether or not the market fails to clear in the limit of search friction vanishing. A seller, who has private information about product quality, and a buyer are matched to bargain over price. They form a long‐term relationship if they reach agreement. They return to the matching pool if they fail to agree or the existing relationship is dissolved. The market fails to clear if and only if the ratio of agents' patience over the dissolution rate exceeds a threshold.

Suggested Citation

Cho, In-Koo and Matsui, Akihiko, Search, Adverse Selection, and Market Clearing (August 2018). International Economic Review, Vol. 59, Issue 3, pp. 1437-1467, 2018. Available at SSRN: https://ssrn.com/abstract=3233209 or http://dx.doi.org/10.1111/iere.12309

In-Koo Cho (Contact Author)

University of Illinois at Urbana-Champaign ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Akihiko Matsui

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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