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A Note on Adverse Selection and Bounded Rationality

Author

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  • Yamashita, Takuro
  • Murooka, Takeshi

Abstract

We consider an adverse selection environment between an informed seller and an uninformed buyer, where no trade occurs when all buyers are rational. The buyer may be a “behavioral” type in the sense that he may take actions different from a rational type. We show that, for any incentive-feasible mechanism with any non-trivial trade, the buyer’s ex-ante expected payoff is strictly negative. Our result implies that whenever trade occurs, some behavioral types must incur losses.

Suggested Citation

  • Yamashita, Takuro & Murooka, Takeshi, 2021. "A Note on Adverse Selection and Bounded Rationality," TSE Working Papers 21-1244, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:125926
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    References listed on IDEAS

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    1. Gabaix, Xavier & Laibson, David & Li, Deyuan & Li, Hongyi & Resnick, Sidney & de Vries, Casper G., 2016. "The impact of competition on prices with numerous firms," Journal of Economic Theory, Elsevier, vol. 165(C), pages 1-24.
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    4. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
    5. Yamashita, Takuro & Murooka, Takeshi, 2021. "Optimal Trade Mechanism with Adverse Selection and Inferential Mistakes," TSE Working Papers 21-1245, Toulouse School of Economics (TSE).
    6. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2018. "Behavioral Household Finance," NBER Working Papers 24854, National Bureau of Economic Research, Inc.
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    Cited by:

    1. 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.

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    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
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • 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

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