American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Behavioral Equilibrium in Economies with Adverse Selection
American Economic Review
(pp. 1269–91)
Abstract
I propose a new solution concept—behavioral equilibrium—to study environments with players who are naive, in the sense that they fail to account for the informational content of other players' actions. I apply the framework to certain adverse selection settings and show that, contrary to the existing literature, the adverse selection problem is exacerbated when naive players fail to account for selection. More generally, the main distinguishing feature of the framework is that, in equilibrium, beliefs about both fundamentals and strategies are jointly restricted. Consequently, whether a behavioral bias may arise or not is determined endogenously in equilibrium. (JEL C70, D82, D83)Citation
Esponda, Ignacio. 2008. "Behavioral Equilibrium in Economies with Adverse Selection." American Economic Review 98 (4): 1269–91. DOI: 10.1257/aer.98.4.1269Additional Materials
JEL Classification
- C70 Game Theory and Bargaining Theory: General
- D82 Asymmetric and Private Information
- D83 Search; Learning; Information and Knowledge; Communication; Belief