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Adverse selection and bounded rationality: an impossibility theorem

Author

Listed:
  • Takeshi Murooka

    (Osaka University)

  • Takuro Yamashita

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

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.

Suggested Citation

  • Takeshi Murooka & Takuro Yamashita, 2022. "Adverse selection and bounded rationality: an impossibility theorem," Post-Print hal-04047796, HAL.
    • Handle: RePEc:hal:journl:hal-04047796
    DOI: 10.1007/s42973-022-00119-w
    as

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