DP16884 Competitive Search and the Social Value of Public Information
In the presence of trading frictions and imperfect information about market conditions, the quality of the available information matters for optimal prices. Prices, in turn, matter for the the likelihood of trading. We model this interdependency in a competitive search equilibrium with aggregate risk and study the social value of better public information. While perfect information is always optimal, marginal effects of information can be positive, negative or neutral for trade. Equilibria featuring inefficient price dispersion, or the
absence of trades in some states of the world, can arise if either some or all sellers choose a price that implies not selling the good when the demand is low. The salient features of the matching function and aggregate risk matter for how information affects the equilibrium. We also find that entry is in general inefficient. Lastly, we provide conditions under which a more general trading mechanism improves upon posting a single price.