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American Economic Review: Vol. 98 No. 4 (September 2008)
AER Volume. 98, Issue 4 | 
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Behavioral Equilibrium in Economies with Adverse Selection
Article Citation
Esponda, Ignacio. 2008. "Behavioral Equilibrium in Economies with Adverse Selection."
American Economic Review,
98(4): 1269-91.
DOI: 10.1257/aer.98.4.1269
DOI: 10.1257/aer.98.4.1269
Abstract
I propose a new solution concept—behavioral equilibrium—to study environments
with players who are naive, in the sense that they fail to account for
the informational content of other players' actions. I apply the framework to
certain adverse selection settings and show that, contrary to the existing literature,
the adverse selection problem is exacerbated when naive players fail
to account for selection. More generally, the main distinguishing feature of the
framework is that, in equilibrium, beliefs about both fundamentals and strategies
are jointly restricted. Consequently, whether a behavioral bias may arise
or not is determined endogenously in equilibrium. (JEL C70, D82, D83)
Article Full-Text Access
Full-text Article
Additional Materials
Link to Appendix (281.71 KB)
Authors
Esponda, Ignacio (NYU)
JEL Classifications
C70: Game Theory and Bargaining Theory: General
D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
D82: Asymmetric and Private Information
D83: Search; Learning; Information and Knowledge; Communication; Belief
