Overconfidence in the Markets for Lemons
AbstractWe extend Akerlof (1970)â€™s 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 on display for sale. Overconfident buyers do not update according to Bayesâ€™ rule but take the noisy signal at face value. We show 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 Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 452.
Date of creation: 17 Dec 2013
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More information through EDIRC
Adverse Selection; Market for Lemons; Overconfidence;
Other versions of this item:
- 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-2013-12-29 (All new papers)
- NEP-COM-2013-12-29 (Industrial Competition)
- NEP-CTA-2013-12-29 (Contract Theory & Applications)
- NEP-IND-2013-12-29 (Industrial Organization)
- NEP-MIC-2013-12-29 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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