Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?

George Mailath and Georg Nöldeke

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.

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: 41 pages
Date: 2007-07-30
New Economics Papers: this item is included in nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Does competitive pricing cause market breakdown under extreme adverse selection? (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:07-022

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