Yamashita, Takuro and Murooka, Takeshi (2021) Optimal Trade Mechanism with Adverse Selection and Inferential Mistakes. TSE Working Paper, n. 21-1245, Toulouse

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Abstract

We study an adverse selection environment, where a rational seller can trade a good of which she privately knows its value to a buyer, and there are gains from trade. The buyer’s types differ in their degree of inferential abilities: A rational type correctly infers the value of the good from the seller’s offer, whereas a naive type under-appreciates the correlation between the seller’s private information and offer. We characterize the optimal menu mechanism that maximizes the social surplus. Notably, no matter how severe the adverse selection is (in particular, even when no trade is the unique possible outcome if all agents are rational), all types of buyers trade in the optimal mecha- nism. The rational buyer’s trade occurs at the expense of the naive buyer’s losses. We also investigate a consumer-protection policy of limiting the losses and discuss its implications.

Item Type: Monograph (Working Paper)
Language: English
Date: September 2021
Place of Publication: Toulouse
Uncontrolled Keywords: Adverse selection, Inferential naivety, Mechanism design, Behavioral contract theory, Consumer protection
JEL Classification: D82 - Asymmetric and Private Information
D86 - Economics of Contract - Theory
D90 - General
D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Institution: Université Toulouse 1 Capitole
Site: UT1
Date Deposited: 08 Sep 2021 08:47
Last Modified: 08 Sep 2021 08:47
OAI Identifier: oai:tse-fr.eu:125925
URI: https://publications.ut-capitole.fr/id/eprint/43798
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