A Note on Adverse Selection and Bounded Rationality

Takuro Yamashita and Takeshi Murooka

No 21-1244, TSE Working Papers from Toulouse School of Economics (TSE)

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.

Keywords: Adverse selection; Inferential naivety; Mechanism design; Behavioral contract theory; Consumer protection (search for similar items in EconPapers)
JEL-codes: D82 D89 D90 D91 (search for similar items in EconPapers)
Date: 2021-09-07
New Economics Papers: this item is included in nep-cta, nep-cwa, nep-isf, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: A Note on Adverse Selection and Bounded Rationality (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:125926

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