American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Optimal Trade Mechanisms with Adverse Selection and Inferential Naïvety
American Economic Journal: Microeconomics
(pp. 33–67)
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.Citation
Murooka, Takeshi, and Takuro Yamashita. 2025. "Optimal Trade Mechanisms with Adverse Selection and Inferential Naïvety." American Economic Journal: Microeconomics 17 (4): 33–67. DOI: 10.1257/mic.20230019Additional Materials
JEL Classification
- D18 Consumer Protection
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making