Adverse selection and bounded rationality: an impossibility theorem

Takuro Yamashita, and Takeshi Murooka


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;

JEL codes

  • 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


Takuro Yamashita, and Takeshi Murooka, Adverse selection and bounded rationality: an impossibility theorem, Japanese Economic Review, September 2022.

Published in

Japanese Economic Review, September 2022