2008): "Adverse Selection in Competitive Search Equilibrium", Working paper

We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection. Principals (e.g. employers or agent who want to buy assets) post contracts, which are modeled as revelation mechanisms, to attract agents (e.g. workers or asset sellers) who have private information about the potential gains from trade. Agents observe the posted contracts and decided where to apply, trading off the terms of trade offered by a contract against the probability of matching, which depends in general on principals capacity constraints and market search frictions. We characterize equilibrium as the solution to a constrained opti-mization problem, and show that in equilibrium principals offer separating contracts to attract different types of agents. We then present a series of applications, including models of the rat race, insurance, and lemons in asset trading. These examples illus-trate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.