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Optimal Trade Mechanisms with Adverse Selection and Inferential Naïvety

Author

Listed:
  • Takeshi Murooka
  • Takuro Yamashita

Abstract

We study an adverse selection environment in which a buyer's inferential ability is heterogeneous: A rational type correctly infers the value of the good from a seller's offer, whereas a naïve type is inattentive to the correlation between the seller's private information and the offer. We characterize the optimal menu mechanism that maximizes the seller's profits or trade surplus. Notably, no matter how severe the adverse selection is, all types of buyers trade. We then provide conditions under which the menu mechanism is optimal among all general mechanisms. A consumer protection policy limiting the naïve buyer's loss is also investigated.

Suggested Citation

  • Takeshi Murooka & Takuro Yamashita, 2025. "Optimal Trade Mechanisms with Adverse Selection and Inferential Naïvety," American Economic Journal: Microeconomics, American Economic Association, vol. 17(4), pages 33-67, November.
    • Handle: RePEc:aea:aejmic:v:17:y:2025:i:4:p:33-67
    DOI: 10.1257/mic.20230019
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    More about this item

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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