Abstract

http://ssrn.com/abstract=1729236
 
 

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Contagious Adverse Selection


Stephen Morris


Princeton University - Department of Economics

Hyun Song Shin


Princeton University - Department of Economics

November 30, 2010

Economic Theory Center Working Paper No. 001-2010

Abstract:     
We illustrate the corrosive effect of even small amounts of adverse selection in an asset market and how it can lead to the total breakdown of trade. The problem is the failure of 'market confidence' defined as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market confidence. We discuss the role of contagious adverse selection and the problem of 'toxic assets' in the recent financial crisis.

Number of Pages in PDF File: 29

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Date posted: December 22, 2010  

Suggested Citation

Morris, Stephen and Shin, Hyun Song, Contagious Adverse Selection (November 30, 2010). Economic Theory Center Working Paper No. 001-2010. Available at SSRN: http://ssrn.com/abstract=1729236 or http://dx.doi.org/10.2139/ssrn.1729236

Contact Information

Stephen Edward Morris (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

Hyun Song Shin
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States

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