|Herweg, Fabian; 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 > Munich 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:||29. Apr 2016 16:37|
Akerlof, G. A. (1970): “The market for “lemons”: quality uncertainty and the market mechanism,” Quarterly Journal of Economics, 84, 488–500.
Alpert, M., and H. Raiffa (1982): “A Progress Report on the Training of Probability Assessors,” in Judgment Under Uncertainty: Heuristics and Biases, ed. by D. Kahneman, and A. Tversky, pp. 294–305, Cambridge. Cambridge University Press.
Bond, E. W. (1982): “A Direct Test of the “Lemons” Model: The Market for Used Pickup Trucks,” American Economic Review, 72, 836–840.
Buehler, R., D. Griffin, and M. Ross (1994): “Exploring the Planning Fallacy: Why People Underestimate Theit Task Completion Times,” Journal of Personality and Social Psychology, 67, 366–381.
Clayson, D. E. (2005): “Performance Overconfidence: Metacognitive Effectsor Misplaced Student Expectations,”Journal of Marketing Education, 27, 122–129.
Ellingsen, T. (1997): “Price Signals Quality: The Case of Perfectly Inelastic Demand,” International Journal of Industrial Organization, 19, 1347–1361.
Englmaier, F. (2010): “Managerial Optimism and Investment Choice,” Managerial and Decision Economics, 31, 286–291.
---- (2011): “Commitment in R&D Tournaments via Strategic Delegation to Overoptimistic Managers,”Managerial and Decision Economics, 32, 63–69.
Eyster, E., and M. Rabin (2005): “Cursed Equilibrium,” Econometrica, 73, 1623–1672.
Genesove, D. (1993): “Adverse Selection in the Wholesale Used Car Market,” Journal of Political Economy, 101, 644–665.
Grubb, M. D. (2009): “Selling to Overconfident Consumers,” American Economic Review, 99, 1770–1807.
Lewis, G. (fortcoming): “Asymmetric Information, Adverse Selection, and Online Disclosure: The Case of Ebay Motors,” American Economic Review.
Sandroni, A., and F. Squintani (2007): “Overconfidence, Insurance, and Paternalism,” American Economic Review, 97, 1994–2004.
Soll, J. B., and J. Klayman (2004): “Overconfidence in Interval Estimates,” Journal of Experimental Psychology. Learning, Memory, and Cognition, 30, 299–314.