Random versus Directed Search for Scarce Resources

Abstract

This paper studies how different search protocols affect social welfare in a search market. There is a mass of homogeneous agents (e.g., firms) and a smaller mass of objects (e.g., workers) that differ in quality. Agents search for objects either through a random or a directed search protocol. Random search protocol, in which agents are randomly paired to an object of any quality, gives rise to adversely selected markets. Directed search protocol, in which agents choose with which quality types to pair, gives rise to congestion. When utility is either non-transferable or transferable through Nash bargaining, I show that random search dominates directed search in terms of welfare, even though each agent would prefer to be able to direct her search. Furthermore, the result generalizes to the case when agents can only partially direct their search based on coarse information about quality, or when there is a small amount of taste heterogeneity in the agent's preferences.

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