Overconfidence in the Market for Lemons
We extend Akerlof ’s (1970) “Market for Lemons” 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 Bayes’ 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.
|Date of creation:||Nov 2011|
|Contact details of provider:|| Postal: Ludwigstr. 28, 80539 Munich, Germany|
Web page: http://www.vwl.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
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.:
- de la Rosa, Leonidas Enrique, 2011.
"Overconfidence and moral hazard,"
Games and Economic Behavior,
Elsevier, vol. 73(2), pages 429-451.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
- Ellingsen, Tore, 1997. "Price signals quality: The case of perfectly inelastic demand," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 43-61, November.
- Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, vol. 72(4), pages 836-40, September.
- repec:esx:essedp:643 is not listed on IDEAS
- Charles Wilson, 1980. "The Nature of Equilibrium in Markets with Adverse Selection," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 108-130, Spring.
- Gregory Lewis, 2011. "Asymmetric Information, Adverse Selection and Online Disclosure: The Case of eBay Motors," American Economic Review, American Economic Association, vol. 101(4), pages 1535-46, June.
- Florian Englmaier, 2010.
"Managerial optimism and investment choice,"
Managerial and Decision Economics,
John Wiley & Sons, Ltd., vol. 31(4), pages 303-310.
- Jonathan Levin, 2001.
"Information and the Market for Lemons,"
01004, Stanford University, Department of Economics.
- Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, vol. 67(2), pages 335-350, November.
- Hanming Fang & Giuseppe Moscarini, 2003.
Cowles Foundation Discussion Papers
1422, Cowles Foundation for Research in Economics, Yale University.
- Michael D. Grubb, 2006.
"Selling to Overconfident Consumers,"
06-018, Stanford Institute for Economic Policy Research.
- Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 644-665, August.
When requesting a correction, please mention this item's handle: RePEc:lmu:muenec:12411. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tamilla Benkelberg)
If references are entirely missing, you can add them using this form.