Working paper

A Note on Adverse Selection and Bounded Rationality

Takuro Yamashita, and Takeshi Murooka

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;

JEL codes

  • D82: Asymmetric and Private Information • Mechanism Design
  • D89: Other
  • D90: General
  • D91: Intertemporal Household Choice • Life Cycle Models and Saving

Reference

Takuro Yamashita, and Takeshi Murooka, “A Note on Adverse Selection and Bounded Rationality”, TSE Working Paper, n. 21-1244, September 2021.

See also

Published in

TSE Working Paper, n. 21-1244, September 2021