Market Design with Endogenous Preferences

40 Pages Posted: 29 Apr 2004  

Aviad Heifetz

Open University of Israel - Department of Economics and Management

Ella Segev

Ben-Gurion University of the Negev - Department of IE&M

Eric L. Talley

Columbia University - School of Law

Date Written: April 2004

Abstract

This paper explores the interdependence between market structure and an important class of extra-rational cognitive biases. Starting with a familiar bilateral monopoly framework, we characterize the endogenous emergence of preference distortions during bargaining which cause negotiators to perceive their private valuations differently than they would outside the adversarial negotiation context. Using this model, we then demonstrate how a number of external interventions in the structure and/or organization of market interactions (occurring before trade, after trade, or during negotiations themselves) can profoundly alter the nature of these dispositions. Our results demonstrate that many such interventions frequently (though not always) share qualitatively similar characteristics to market interventions that are often proposed for overcoming more conventional forms of market failure. Nevertheless, our analysis underscores the importance of understanding the precise link between cognitive failures and market structure prior to the implementation any particular proposed reform.

Keywords: Market Design, Endogenous Preferences

JEL Classification: H20, D40, Z13

Suggested Citation

Heifetz, Aviad and Segev, Ella and Talley, Eric L., Market Design with Endogenous Preferences (April 2004). USC Law School, Olin Research Paper No. 04-6; and USC CLEO Research Paper No. C04-3. Available at SSRN: https://ssrn.com/abstract=536962 or http://dx.doi.org/10.2139/ssrn.536962

Aviad Heifetz (Contact Author)

Open University of Israel - Department of Economics and Management ( email )

108 Ravutski st.
P.O. B. 808
Raanana, 43107
Israel
+972 9 778 1878 (Phone)
+972 9 778 0668 (Fax)

HOME PAGE: http://www.openu.ac.il/Personal_sites/Aviad-Heifetz.html

Ella Segev

Ben-Gurion University of the Negev - Department of IE&M ( email )

1 Ben-Gurion Blvd
Beer Sheva, 84105
Israel

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

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