Sorting versus Screening in Markets with Adverse Selection
"Sorting versus Screening in Markets with Adverse Selection" (jont with Piero Gottardi (University of Essex))
We consider the directed search equilibrium in a market for lemons with search frictions. Uninformed principals attract privately informed agents by posting general direct mechanisms. In this market agents can be separated either within the mechanism (screening) or by their choice of mechanism (sorting). We show that the extent to which either mode of separation occurs in equilibrium crucially depends on the meeting technology and the degree of adverse selection: tighter constraints in the principals’ ability to meet agents and stronger interdependence between valuations lead to more sorting (and less screening) in equilibrium.