Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93879
Authors: 
Herweg, Fabian
Müller, Daniel
Year of Publication: 
2013
Series/Report no.: 
SFB/TR 15 Discussion Paper 452
Abstract: 
We extend Akerlof (1970)'s '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 on display for sale. Overconfident buyers do not update according to Bayes' rule but take the noisy signal at face value. We show 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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