Optimal Trade Mechanisms with Adverse Selection and Inferential Naïvety

Takeshi Murooka and Takuro Yamashita

American Economic Journal: Microeconomics, 2025, vol. 17, issue 4, 33-67

Abstract: We study an adverse selection environment in which a buyer's inferential ability is heterogeneous: A rational type correctly infers the value of the good from a seller's offer, whereas a naïve type is inattentive to the correlation between the seller's private information and the offer. We characterize the optimal menu mechanism that maximizes the seller's profits or trade surplus. Notably, no matter how severe the adverse selection is, all types of buyers trade. We then provide conditions under which the menu mechanism is optimal among all general mechanisms. A consumer protection policy limiting the naïve buyer's loss is also investigated.

JEL-codes: D18 D82 D86 D91 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1257/mic.20230019

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