Constrained efficiency with adverse selection and directed search: FB3-5/2017-15E-PDF

“Constrained efficient allocation (CE) is characterized in a model of adverse selection anddirected search (Guerrieri, Shimer, and Wright (2010)). CE is defined to be the allocation that maximizes welfare, the ex-ante utility of all agents, subject to the frictions of the environment. When equilibrium does not achieve the first best (the allocation that maximizes welfare under complete information), then welfare in the CE is strictly higher than welfare in the equilibrium allocation. That is, equilibrium is not constrained efficient. Under some conditions, welfare in the CE even attains welfare in the first best. Finally, sufficient conditions are provided under which equilibrium is not constrained Pareto efficient, either. Cross-subsidization is the key to all these results. In an asset market application, the first best is shown to be implementable through tax schedules that are monotone in the asset prices"--Abstract, p. ii.

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Department/Agency Bank of Canada.
Title Constrained efficiency with adverse selection and directed search
Series Title Bank of Canada staff working paper,
Publication Type Series - View Master Record
Language [English]
Format Electronic
Electronic Document

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Note "April 2017." "This paper was previously circulated under the title “Constrained Efficiency with Searchand Information Frictions”"--Acknowledgements, p. i.
Date 2017.
Number of Pages ii, 80 p. :
Catalogue Number
  • FB3-5/2017-15E-PDF
Subject Terms Capital markets, Financial institutions, Regulation, Policy