Abstract
This paper merges the non-expected utility approach (Tversky and Kahneman (1992) and Quiggin (1982)) into Akerlof's (1970) model of Market for lemons. Our main finding suggests that when the proportion of traded lemons is high (low), the problem of market failure is mitigated (enhanced). We derive the results for different probability weighting functions and analyze the phenomenon of market failure in light of non-expected utility maximization.
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