Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

47 Pages Posted: 25 Jul 2006

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 2006

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

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

Suggested Citation

Mailath, George J. and Nöldeke, Georg, Extreme Adverse Selection, Competitive Pricing, and Market Breakdown (July 2006). Cowles Foundation Discussion Paper No. 1573, Available at SSRN: https://ssrn.com/abstract=920475

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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