Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?

41 Pages Posted: 1 Aug 2007

See all articles by George J. Mailath

George J. Mailath

University of Pennsylvania - Department of Economics; Research School of Economics, ANU

Georg Nöldeke

University of Basel; University of Basel

Date Written: July 30, 2007

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

JEL Classification: D40, D82, D83, G12, G14

Suggested Citation

Mailath, George J. and Nöldeke, Georg, Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection? (July 30, 2007). PIER Working Paper No. 07-022, Available at SSRN: https://ssrn.com/abstract=1004287 or http://dx.doi.org/10.2139/ssrn.1004287

George J. Mailath (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7908 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://web.sas.upenn.edu/gmailath/

Research School of Economics, ANU ( email )

HW Arndt Building
College of Business and Economics
Canberra, ACT 2601
Australia

Georg Nöldeke

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

University of Basel ( email )

Peter Merian-Weg 6
Basel, 4002
Switzerland

HOME PAGE: http://sites.google.com/site/georgnoldeke/

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