Optimal Trade Mechanisms with Adverse Selection and Inferential Naivety (13:00-14:00)

Title:  Optimal Trade Mechanisms with Adverse Selection and Inferential Naivety

Abstract : We study an adverse selection environment in which a buyer's inferential ability is heterogeneous: A rational type correctly infers the value of the good from a seller's offer, whereas a naive type under-appreciates the correlation between the seller's private information and offer. We characterize the optimal menu mechanism that maximizes the trade surplus. Notably, no matter how severe the adverse selection is, all types of buyers trade in the optimal mechanism. The rational buyer's trade occurs at the expense of the naive buyer's loss. A consumer protection policy of limiting the naive buyer's loss is also being investigated.