IDEAS home Printed from https://ideas.repec.org/p/osp/wpaper/21e006.html
   My bibliography  Save this paper

Optimal Trade Mechanisms with Adverse Selection and Inferential Mistakes

Author

Listed:
  • Takeshi Murooka

    (Osaka School of International Public Policy (OSIPP), Osaka University)

  • Takuro Yamashita

    (Toulouse School of Economics, University of Toulouse)

Abstract

We study an adverse selection environment, where a rational seller can trade a good of which she privately knows its value to a buyer, and there are gains from trade. The buyer's types differ in their degree of inferential abilities: A rational type correctly infers the value of the good from the seller's offer, whereas a naive type under-appreciates the correlation between the seller's private information and offer. We characterize the optimal menu mechanism that maximizes the social surplus. Notably, no matter how severe the adverse selection is (in particular, even when no trade is the unique possible outcome if all agents are rational), all types of buyers trade in the optimal mechanism. The rational buyer's trade occurs at the expense of the naive buyer's losses. We also investigate a consumer-protection policy of limiting the losses and discuss its implications.

Suggested Citation

  • Takeshi Murooka & Takuro Yamashita, 2021. "Optimal Trade Mechanisms with Adverse Selection and Inferential Mistakes," OSIPP Discussion Paper 21E006, Osaka School of International Public Policy, Osaka University.
    • Handle: RePEc:osp:wpaper:21e006
    as

    Download full text from publisher

    File URL: http://www.osipp.osaka-u.ac.jp/archives/DP/2021/DP2021E006.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jehiel, Philippe & Koessler, Frédéric, 2008. "Revisiting games of incomplete information with analogy-based expectations," Games and Economic Behavior, Elsevier, vol. 62(2), pages 533-557, March.
    2. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 689-714.
    3. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.
    4. Paul Heidhues & Botond Kőszegi & Takeshi Murooka, 2017. "Inferior Products and Profitable Deception," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 323-356.
    5. Green, Jerry R & Laffont, Jean-Jacques, 1987. "Posterior Implementability in a Two-Person Decision Problem," Econometrica, Econometric Society, vol. 55(1), pages 69-94, January.
    6. Geoffroy de Clippel & Kfir Eliaz & Kareen Rozen, 2014. "Competing for Consumer Inattention," Journal of Political Economy, University of Chicago Press, vol. 122(6), pages 1203-1234.
    7. Alessandro Ispano & Peter Schwardmann, 2018. "Competition over Cursed Consumers," CESifo Working Paper Series 7046, CESifo.
    8. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
    9. Erik Eyster & Matthew Rabin & Dimitri Vayanos, 2019. "Financial Markets Where Traders Neglect the Informational Content of Prices," Journal of Finance, American Finance Association, vol. 74(1), pages 371-399, February.
    10. Johannes Johnen, 2020. "Dynamic competition in deceptive markets," RAND Journal of Economics, RAND Corporation, vol. 51(2), pages 375-401, June.
    11. Benjamin Enke & Florian Zimmermann, 2019. "Correlation Neglect in Belief Formation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 313-332.
    12. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Nonexclusive Competition in the Market for Lemons," Econometrica, Econometric Society, vol. 79(6), pages 1869-1918, November.
    13. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    14. Takeshi Murooka & Takuro Yamashita, 2020. "A Note on Adverse Selection and Bounded Rationality," OSIPP Discussion Paper 20E002, Osaka School of International Public Policy, Osaka University.
    15. repec:oup:restud:v:84:y::i:1:p:323-356. is not listed on IDEAS
    16. Benjamin Enke, 2020. "What You See Is All There Is," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1363-1398.
    17. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2018. "Behavioral Household Finance," NBER Working Papers 24854, National Bureau of Economic Research, Inc.
    18. Ginger Zhe Jin & Michael Luca & Daniel Martin, 2021. "Is No News (Perceived As) Bad News? An Experimental Investigation of Information Disclosure," American Economic Journal: Microeconomics, American Economic Association, vol. 13(2), pages 141-173, May.
    19. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    20. Alexander L. Brown & Colin F. Camerer & Dan Lovallo, 2012. "To Review or Not to Review? Limited Strategic Thinking at the Movie Box Office," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 1-26, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Takeshi Murooka & Takuro Yamashita, 2020. "A Note on Adverse Selection and Bounded Rationality," OSIPP Discussion Paper 20E002, Osaka School of International Public Policy, Osaka University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessandro Ispano & Peter Schwardmann, 2018. "Competition over Cursed Consumers," CESifo Working Paper Series 7046, CESifo.
    2. Alessandro Ispano & Peter Schwardmann, 2023. "Cursed Consumers and the Effectiveness of Consumer Protection Policies," Journal of Industrial Economics, Wiley Blackwell, vol. 71(2), pages 407-440, June.
    3. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.
    4. Kai Barron & Steffen Huck & Philippe Jehiel, 2024. "Everyday Econometricians: Selection Neglect and Overoptimism When Learning from Others," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 162-198, August.
    5. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    6. Takeshi Murooka & Takuro Yamashita, 2023. "Adverse selection and bounded rationality: an impossibility theorem," The Japanese Economic Review, Springer, vol. 74(3), pages 439-444, July.
    7. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 577-619.
    8. Sheth, Jesal D., 2021. "Disclosure of information under competition: An experimental study," Games and Economic Behavior, Elsevier, vol. 129(C), pages 158-180.
    9. Mira Frick & Ryota Iijima & Yuhta Ishii, 2018. "Dispersed Behavior and Perceptions in Assortative Societies," Cowles Foundation Discussion Papers 2128R, Cowles Foundation for Research in Economics, Yale University, revised Mar 2019.
    10. Schmitt, Stefanie Y. & Bruckner, Dominik, 2023. "Unaware consumers and disclosure of deficiencies," Games and Economic Behavior, Elsevier, vol. 142(C), pages 1018-1042.
    11. Ran Spiegler, 2019. "Behavioral Economics and the Atheoretical Style," American Economic Journal: Microeconomics, American Economic Association, vol. 11(2), pages 173-194, May.
    12. Jeanne Hagenbach & Frédéric Koessler, 2017. "Simple versus rich language in disclosure games," Review of Economic Design, Springer;Society for Economic Design, vol. 21(3), pages 163-175, September.
    13. Antler, Yair, 2018. "Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?," CEPR Discussion Papers 13054, C.E.P.R. Discussion Papers.
    14. Takeshi Murooka & Takuro Yamashita, 2020. "A Note on Adverse Selection and Bounded Rationality," OSIPP Discussion Paper 20E002, Osaka School of International Public Policy, Osaka University.
    15. Gamp, Tobias & Krähmer, Daniel, 2022. "Competition in Search Markets with Naive Consumers," Rationality and Competition Discussion Paper Series 364, CRC TRR 190 Rationality and Competition.
    16. Vikander Nick, 2019. "Sellouts, Beliefs, and Bandwagon Behavior," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-21, January.
    17. Tobias Gamp & Daniel Krähmer, 2022. "Competition in search markets with naive consumers," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 356-385, June.
    18. Schwardmann, Peter & Ispano, Alessandro, 2016. "Competitive pricing and quality disclosure to cursed consumers," VfS Annual Conference 2016 (Augsburg): Demographic Change 145573, Verein für Socialpolitik / German Economic Association.
    19. Johannes Johnen & Robert Somogyi, 2019. "Deceptive Products on Platforms," Working Papers 19-13, NET Institute.
    20. Fabian Herweg & Antonio Rosato, 2020. "Bait and ditch: Consumer naïveté and salesforce incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 97-121, January.

    More about this item

    Keywords

    adverse selection; inferential naivety; mechanism design; behavioral contract theory; consumer protection;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:osp:wpaper:21e006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akiko Murashita (email available below). General contact details of provider: https://edirc.repec.org/data/iposujp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.