|Herweg, Fabian and Müller, Daniel (November 2011): Overconfidence in the Market for Lemons. Discussion Papers in Economics 2011-17|
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.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||Adverse Selection, Market for Lemons, Overconfidence|
Economics > Discussion Papers in Economics
|Subjects:||300 Social sciences > 300 Social sciences, sociology and anthropology|
300 Social sciences > 330 Economics
|JEL Classification:||D82, L15|
|Deposited On:||09. Nov 2011 12:50|
|Last Modified:||28. Nov 2013 14:51|
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