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Sorting versus Screening in Decentralized Markets with Adverse Selection

Author

Listed:
  • Sarah Auster

    (Department of Economics, University of Bonn)

  • Piero Gottardi

    (Department of Economics, Essex University and University of Venice)

Abstract

We study the role of traders' meeting capacities in decentralized markets with adverse selection. Uninformed customers choose trading mechanisms in order to find a provider for a service. Providers are privately informed about their quality and aim to match with one of the customers. We consider a rich set of meeting technologies and characterize the properties of the equilibrium allocations for each of them. In equilibrium, different provider types can be separated either via sorting---they self-select into different submarkets---or screening within the trading mechanism, or a combination of the two. We show that, as the meeting technology improves, the equilibrium features more screening and less sorting. Interestingly, this reduces both the average quality of trade as well as the total level of trade in the economy. The trading losses are, however, compensated by savings in entry costs, so that welfare increases.

Suggested Citation

  • Sarah Auster & Piero Gottardi, 2022. "Sorting versus Screening in Decentralized Markets with Adverse Selection," ECONtribute Discussion Papers Series 180, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:180
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    References listed on IDEAS

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    Cited by:

    1. Sarah Auster & Piero Gottardi & Ronald Wolthoff, 2022. "Simultaneous Search and Adverse Selection," Working Papers tecipa-734, University of Toronto, Department of Economics.

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    More about this item

    Keywords

    Competitive Search; Adverse Selection; Market Segmentation;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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