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Overconfidence in the Market for Lemons

Title data

Herweg, Fabian ; Müller, Daniel:
Overconfidence in the Market for Lemons.
In: The Scandinavian Journal of Economics. Vol. 118 (April 2016) Issue 2 . - pp. 354-371.
ISSN 0347-0520
DOI: https://doi.org/10.1111/sjoe.12135

Abstract in another language

We extend Akerlof's "Market for Lemons" (1970, Quarterly Journal of Economics 84, 488–500) 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. However, this stabilization comes at a cost: rational buyers are crowded out of the market.

Further data

Item Type: Article in a journal
Refereed: Yes
Institutions of the University: Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Economics > Chair Economics VIII: International Competition Economics - Univ.-Prof. Dr. Fabian Herweg
Faculties
Faculties > Faculty of Law, Business and Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Economics
Result of work at the UBT: No
DDC Subjects: 300 Social sciences
300 Social sciences > 330 Economics
Date Deposited: 01 Dec 2017 08:22
Last Modified: 01 Dec 2017 08:22
URI: https://eref.uni-bayreuth.de/id/eprint/40775