Search and Information Frictions in Decentralized Markets
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This thesis studies the importance and implications of information asymmetry in decentralized markets with search frictions. The first chapter provides an introduction and literature review. In the next chapter, I propose a model of the housing market using a search framework in which sellers are unable to commit to asking prices announced ex ante. Relaxing the commitment assumption prevents sellers from using price posting as a signalling device to direct buyers' search. Adverse selection and inefficient entry on the demand side then contribute to housing market illiquidity. Real estate agents that can facilitate the search process can segment the market and alleviate information frictions. In Chapter 3, I further study the importance and implications of the commitment assumptions embedded in directed search models. I eliminate commitment to take-it-or-leave-it trading mechanisms in a model of the labour market with worker heterogeneity and a matching process that allows for multiple firms to match with a single worker. When workers and firms cannot commit to ex ante offers, to an allocation rule, or to an ex post bargaining strategy, the equilibrium is necessarily inefficient. This is true for a broad class of protocols for wage determination, of which bilateral bargaining and Bertrand competition are special cases. Finally, Chapter 4 presents a theory of land market activity for settings where there is uncertainty and private information about the security of land tenure. Land sellers match with buyers in a competitive search environment, and an illiquid land market emerges as a screening mechanism. The implications of the theory are tested using household level data from Indonesia. As predicted, formally titled land is more liquid than untitled land in the sense that ownership rights are more readily transferable.