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Working Papers (2001), ESSEC Business School

Quality Uncertainty and Welfare in a Search Economy

BESANCENOT D., VRANCEANU Radu

Equilibrium search models carried a step further the neoclassical analysis of decentralized economies, by formalizing the acquisition of price information a costly activity. In a classical study, Peter Diamond proved that a search economy hosting homogeneous agents cannot reach spontaneously the Walrasian equilibrium: to the contrary, the resulting equilibrium has rather dramatic implications in terms of welfare, as firms post a single monopoly price and reap all consumers' surplus. In this paper, we show that additional uncertainty on product quality may bring about a Pareto-improved allocation in search economy.

BESANCENOT, D. and VRANCEANU, R. (2001). Quality Uncertainty and Welfare in a Search Economy. ESSEC Business School.