Screening and Adverse Selection in Frictional Markets

Supersedes Working Paper WP 16-10 - Screening and Adverse Selection in Frictional Markets

They characterize the unique equilibrium, and use their characterization to explore the interaction between adverse selection, screening, and imperfect competition. The authors show that the relationship between an agent’s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market structure. The authors also show that increasing competition and reducing informational asymmetries can decrease welfare.