Overconfidence in the Market for Lemons

Fabian Herweg (fabian.herweg@uni-bayreuth.de) and Daniel Müller

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: We extend Akerlof ’s (1970) “Market for Lemons” by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. The main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market.

Keywords: Adverse Selection; Market for Lemons; Overconfidence (search for similar items in EconPapers)
JEL-codes: D82 L15 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-mic and nep-neu
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https://epub.ub.uni-muenchen.de/12411/1/Herweg_Mue ... arket_for_Lemons.pdf (application/pdf)

Related works:
Journal Article: Overconfidence in the Markets for Lemons (2016)
Working Paper: Overconfidence in the Markets for Lemons (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:12411

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