Overconfidence in the Market for Lemons
AbstractWe extend Akerlof â€™s (1970) â€œMarket for Lemonsâ€ by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayesâ€™ rule but take the noisy signal at face value. The main finding is that the presence of overconfident buyers can stabilize the market outcome by preventing total adverse selection. This stabilization, however, comes at a cost: rational buyers are crowded out of the market.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 12411.
Date of creation: Nov 2011
Date of revision:
Adverse Selection; Market for Lemons; Overconfidence;
Other versions of this item:
- Herweg, Fabian & Müller, Daniel, 2013. "Overconfidence in the Markets for Lemons," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 452, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
- NEP-CBE-2011-11-14 (Cognitive & Behavioural Economics)
- NEP-CTA-2011-11-14 (Contract Theory & Applications)
- NEP-MIC-2011-11-14 (Microeconomics)
- NEP-NEU-2011-11-14 (Neuroeconomics)
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