Markets with Frictions

Catalog description

In this class, we will study the equilibrium and efficiency properties of markets in which there are information frictions—in the sense that market participants have limited information regarding the quality and price of various goods—and transaction frictions—in the sense that market transactions are carried out in a decentralized fashion. We will show that realistic information and transaction fictions can provide a simple and natural explanation for unemployment, credit rationing, wage inequality, price dispersion, as well as for other phenomena that cannot be understood in the context of the neoclassical framework. Moreover, we will show that, once information and transaction frictions are taken into account, the market allocation need not be efficient and appropriate government interventions may lead to welfare gains.