Adverse selection and bounded rationality: an impossibility theorem

Takeshi Murooka () and Takuro Yamashita
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Takeshi Murooka: Osaka University

The Japanese Economic Review, 2023, vol. 74, issue 3, No 8, 439-444

Abstract: Abstract We consider an adverse selection environment between an informed seller and an uninformed buyer, where no trade occurs when all buyers are the standard Bayesian-rational type. The buyer may be a “behavioral” type in that he may take actions different from the 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—highlighting a new trade-off between social surplus and buyer protection.

Keywords: Adverse selection; Bounded rationality; Mechanism design; No-trade theorem; Consumer protection (search for similar items in EconPapers)
JEL-codes: D82 D83 D86 D90 D91 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s42973-022-00119-w

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