Search With Adverse Selection

This paper analyzes a sequential search model with adverse selection. We study information aggregation by the price-how close the equilibrium prices are to the full-information prices-when search frictions are small. We identify circumstances under which prices fail to aggregate information well even when search frictions are small. We trace this to a strong form of the winner's curse that is present in the sequential search model. The failure of information aggregation may result in inefficient allocations.