Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

George Mailath and Georg Nöldeke

No 1573, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade.

Keywords: Adverse selection; Market breakdown; Separation; Competitive pricing (search for similar items in EconPapers)
JEL-codes: D40 D82 D83 G12 G14 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2006-07
New Economics Papers: this item is included in nep-com, nep-fin, nep-fmk and nep-mic
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Related works:
Working Paper: Extreme Adverse Selection, Competitive Pricing, and Market Breakdown (2006)
Working Paper: Extreme Adverse Selection, Competitive Pricing, and Market Breakdown (2006)
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