We consider an adverse selection environment between an informed seller and an uninformed buyer, where no trade occurs when all buyers are the standard Bayesian-rational type. The buyer may be a “behavioral” type in that he may take actions different from the rational type. We show that, for any incentive-feasible mechanism with any non-trivial trade, the buyer’s ex-ante expected payoff is strictly negative. Our result implies that whenever trade occurs, some behavioral types must incur losses—highlighting a new trade-off between social surplus and buyer protection.
Adverse selection; Bounded rationality; Mechanism design; No-trade theorem; Consumer protection;
- D82: Asymmetric and Private Information • Mechanism Design
- D83: Search • Learning • Information and Knowledge • Communication • Belief
- D86: Economics of Contract: Theory
- D90: General
- D91: Intertemporal Household Choice • Life Cycle Models and Saving
Japanese Economic Review, September 2022