Costly search with adverse selection: solicitation curse versus acceleration blessing
We analyze a dynamic trading model of adverse selection where a seller can increase the frequency of strategic price quotes. A low‐quality seller benefits more from trade and, therefore, searches more intensively than a high‐quality seller. This makes a seller's contact carry negative information but a seller's availability become a stronger indicator of high quality. In the stationary environment, the two effects exactly offset each other, and reducing search costs is weakly beneficial to the seller. In the nonstationary environment, the relative strengths of the two effects vary over time, and reducing search costs can be detrimental to the seller.
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Document Type: Research Article
Publication date: May 1, 2017