Constrained Efficiency with Search and Information Frictions

I characterize the constrained efficient (or planner's) allocation in a directed (competitive) search model with private information. There are sellers with private information on one side of the market and homogeneous buyers on the other side. They match bilaterally in diff erent submarkets and trade. In each submarket, there are search frictions. In the market economy, homogeneous buyers enter diff erent submarkets (i.e., post diff erent contracts) and sellers with private information direct their search toward their preferred submarket. I defi ne a planner whose objective is to maximize social welfare subject to the information and matching frictions of the environment. The planner can impose taxes and subsidies on agents that vary across submarkets while being subject to an overall budget-balance condition. I show that the planner generally achieves strictly higher welfare than the market economy. I also derive conditions under which the planner achieves the complete information allocation. I present examples in the context of financial and labor markets, explicitly solve for the efficient tax and transfer schemes and compare the planner's allocation with the equilibrium allocation.