Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104339
Authors: 
Herweg, Fabian
Müller, Daniel
Year of Publication: 
2011
Series/Report no.: 
Munich Discussion Paper 2011-17
Abstract: 
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.
Subjects: 
Adverse Selection
Market for Lemons
Overconfidence
JEL: 
D82
L15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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