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Cycling and Categorical Learning in Decentralized Adverse Selection Economies

Jehiel, Philippe and Mohlin, Erik LU (2021) In Working Papers
Abstract
We study learning in a decentralized pairwise adverse selection economy, where buyers have access to the quality of traded goods but not to the quality of non- traded goods. Buyers categorize ask prices in order to predict quality as a function of ask price. The categorization is endogenously determined so that outcomes that are observed more often are categorized more finely, and within each category beliefs reflect the empirical average. This leads buyers to have a very fine understanding of the relationship between qualities and ask prices for prices below the current market price, but only a coarse understanding above that price. We find that this induces a price cycle involving the Nash equilibrium price, and one or more higher prices.
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Adverse selection, Bounded rationality, Categorization, Learning, Model misspecification, OTC markets, C70, C73, D82, D83, D91
in
Working Papers
issue
2021:11
pages
56 pages
language
English
LU publication?
yes
id
9dfea9ad-c322-4326-b034-f79d400961b3
date added to LUP
2021-09-08 15:03:07
date last changed
2024-03-14 13:28:56
@misc{9dfea9ad-c322-4326-b034-f79d400961b3,
  abstract     = {{We study learning in a decentralized pairwise adverse selection economy, where buyers have access to the quality of traded goods but not to the quality of non- traded goods. Buyers categorize ask prices in order to predict quality as a function of ask price. The categorization is endogenously determined so that outcomes that are observed more often are categorized more finely, and within each category beliefs reflect the empirical average. This leads buyers to have a very fine understanding of the relationship between qualities and ask prices for prices below the current market price, but only a coarse understanding above that price. We find that this induces a price cycle involving the Nash equilibrium price, and one or more higher prices.}},
  author       = {{Jehiel, Philippe and Mohlin, Erik}},
  keywords     = {{Adverse selection; Bounded rationality; Categorization; Learning; Model misspecification; OTC markets; C70; C73; D82; D83; D91}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2021:11}},
  series       = {{Working Papers}},
  title        = {{Cycling and Categorical Learning in Decentralized Adverse Selection Economies}},
  url          = {{https://lup.lub.lu.se/search/files/177103357/WP21_11.pdf}},
  year         = {{2021}},
}