Yamashita, Takuro and Murooka, Takeshi (2022) Adverse selection and bounded rationality: an impossibility theorem. The Japanese Economic Review.

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Identification Number : 10.1007/s42973-022-00119-w


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.

Item Type: Article
Language: English
Date: 27 September 2022
Refereed: Yes
Place of Publication: Hoboken
Uncontrolled Keywords: Adverse selection, Bounded rationality, Mechanism design, No-trade theorem, Consumer protection
JEL Classification: D82 - Asymmetric and Private Information
D83 - Search; Learning; Information and Knowledge; Communication; Belief
D86 - Economics of Contract - Theory
D90 - General
D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 27 Mar 2023 13:17
Last Modified: 29 Mar 2023 12:00
OAI Identifier: oai:tse-fr.eu:127998
URI: https://publications.ut-capitole.fr/id/eprint/47275
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