Adverse Selection Under Ambiguity∗ Job Market Paper
نویسندگان
چکیده
This paper analyses a bilateral trade problem with asymmetric information and ambiguity aversion. There is a buyer and a seller who bargain over the exchange of an indivisible good. The seller is privately informed about the quality of the good, which determines both his valuation and the buyer’s valuation. In the absence of ambiguity, the contract that maximizes the buyer’s payoff is a posted price. In this paper, the buyer holds ambiguous beliefs about the quality of the good and therefore faces ambiguity over both the seller’s willingness to accept an offer and her valuation of the good. The first type of ambiguity is exacerbated when the offered price is low, while the second type of ambiguity is exacerbated when the offered price is high. An ambiguity-averse buyer solves this conflict by proposing a screening menu rather than a posted price, thereby hedging against both types of ambiguity. Ambiguity aversion in this setting has opposing effects on the level of trade: the buyer’s pessimism about the seller’s valuation has a positive effect on trade, while the buyer’s pessimism about her own valuation has a negative effect on trade. The paper separates the two effects and shows under which conditions an increase in ambiguity leads to an increase or decrease in trade. JEL Classification: D81, D82, D86.
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