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Cycling and Categorical Learning in Decentralized Adverse Selection Economies

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  • Philippe Jehiel

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, UCL - University College of London [London])

  • Erik Mohlin

    (Skane University Hospital [Lund], Institute for Futures Studies)

Abstract

We study learning in a decentralized pairwise adverse selection economy, where buyers have access to the quality of traded goods but not to the quality of nontraded goods. Buyers categorize ask prices in order to predict quality as a function of ask price. The categorization is endogenously determined so that outcomes that are observed more often are categorized more finely, and within each category beliefs reflect the empirical average. This leads buyers to have a very fine understanding of the relationship between qualities and ask prices for prices below the current market price, but only a coarse understanding above that price. We find that this induces a price cycle involving the Nash equilibrium price, and one or more higher prices.

Suggested Citation

  • Philippe Jehiel & Erik Mohlin, 2022. "Cycling and Categorical Learning in Decentralized Adverse Selection Economies," PSE Working Papers halshs-03754118, HAL.
    • Handle: RePEc:hal:psewpa:halshs-03754118
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03754118
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    References listed on IDEAS

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    Cited by:

    1. Philippe Jehiel, 2022. "Analogy-Based Expectation Equilibrium and Related Concepts:Theory, Applications, and Beyond," Working Papers halshs-03735680, HAL.
    2. Philippe Jehiel & Erik Mohlin, 2023. "Categorization in Games: A Bias-Variance Perspective," Working Papers halshs-04154272, HAL.

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    More about this item

    Keywords

    Adverse selection; Bounded rationality; Categorization; Learning; Model misspeciÖcation; OTC markets Adverse selection; Model misspecification; OTC markets;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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