An Equilibrium Analysis of Search and Breach of Contract
The literature on markets where agents have imperfect information about their trading possibilities has been growing considerably. Many models of this literature depend fundamentally on asymmetries : either buyers or sellers set prices but not both. We, however, shall consider a symmetric model where individuals meet pairwise and negotiate contracts. Individuals find potential contracting partners in a costly, stochastic search process. The purpose of a contract is to carry out a single project. The worth of a project depends on the quality of the match between the two individuals. Our model, in fact, assumes for simplicity precisely two qualities : good (project with large output) and poor (project with small output). An individual, therefore, can be in any of these three positions : without a partner, in a poor partnership, or in a good partnership.