Efficient Dynamic Matching with Costly Search and Incomplete Information

This paper considers a frictional market where buyers and sellers, with unit demand and supply, search for trading opportunities. The analysis focuses on explicit search frictions, allows for two-sided incomplete information, and puts no restriction on agent heterogeneity. In this context, a non-trivial, full trade search equilibrium is shown to exist, equilibria are characterized as the values that satisfy the first order conditions for a non-linear planner's (optimization) problem, and necessary and sufficient conditions are provided for the existence of efficient search equilibria under complete information. These results fully generalize to the two-sided incomplete information setting, under an additive separability condition. Also, search equilibria are shown to converge to a competitive equilibria under both complete and incomplete information as frictions become small. However, inefficiencies may remain at the limit: the limiting competitive equilibrium can be an equilibrium for only a proper subset of the full economy under consideration. Nevertheless a sequence of search equilibria that converges to the competitive equilibrium of the full economy is shown to exist