Social and Information Sciences Laboratory (SISL) Seminar

Abstract: In this paper, I study the welfare effects of adverse selection and congestion in search markets with constrained capacity or limited entry. Agents with homogeneous preferences search for objects of heterogeneous types either through random or directed search. Random search—agents are randomly matched to any type—gives rise to adverse selection, while directed search—agents choose with which types to match—gives rise to congestion. I show that random search dominates directed search in terms of welfare, even though each agent would prefer to be able to direct her search.