||Search, Adverse Selection, and Market Clearing
||In-Koo Cho and Akihiko Matsui
||This paper investigates the conditions under which adverse selection causes the coexistence of involuntary unemployment and involuntary vacancy even if search friction vanishes in a dynamic decentralized trading model. An economy is populated by high quality and low quality sellers as well as buyers. In each period, sellers who know the quality of the good and buyers who do not observe the quality are randomly matched in pairs. For each pair, a price is randomly drawn. If either party disagrees, then the two agents return to the pool. If both parties agree, then the trade occurs, and the two agents leave the pool, generating surplus from trading. The long term agreement is dissolved by the decision of either party or by an exogenous shock. Upon dissolution of the long term relationship, the seller and the buyer return to the matching market. We demonstrate that involuntary unemployment and involuntary vacancy coexist under adverse selection if and only if agents are sufficiently patient relative to the rate of dissolution when there are more sellers than buyers, and that they coexist whenever there are no less buyers than sellers. We also show that the main results of the baseline model are carried over to models with different bargaining protocols such as a take-it-or-leave-it offer game.
||Involuntary unemployment, Involuntary vacancy, Matching, Search
friction, Adverse selection, Undominated equilibrium, Market clearing
||Paper in English (36 pages)