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Adverse Selection, Heterogeneous Beliefs, and Evolutionary Learning

Author

Listed:
  • Clemens Buchen

    (WHU-Otto Beisheim School of Management)

  • Alberto Palermo

    (Trier University)

Abstract

We relax the common assumption of homogeneous beliefs in principal-agent relationships with adverse selection. Principals are competitors in the product market and write contracts also on the base of an expected aggregate. The model is a version of a cobweb model. In an evolutionary learning set-up, which is imitative, principals can have different beliefs about the distribution of agents’ types in the population. The resulting nonlinear dynamic system is studied. Convergence to a uniform belief depends on the relative size of the bias in beliefs.

Suggested Citation

  • Clemens Buchen & Alberto Palermo, 2022. "Adverse Selection, Heterogeneous Beliefs, and Evolutionary Learning," Dynamic Games and Applications, Springer, vol. 12(2), pages 343-362, June.
    • Handle: RePEc:spr:dyngam:v:12:y:2022:i:2:d:10.1007_s13235-021-00396-x
    DOI: 10.1007/s13235-021-00396-x
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    References listed on IDEAS

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    More about this item

    Keywords

    Evolutionary game theory; Imitation equilibrium; Heterogeneous beliefs; Adverse selection; Cobweb model;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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