Extreme Adverse Selection, Competitive Pricing, and Market Breakdown
AbstractExtreme 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.
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Bibliographic InfoPaper provided by UCLA Department of Economics in its series Levine's Bibliography with number 321307000000000267.
Date of creation: 29 Jul 2006
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Other versions of this item:
- George J. Mailath & Georg Noldeke, 2006. "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown," Cowles Foundation Discussion Papers 1573, Cowles Foundation for Research in Economics, Yale University.
- George J. Mailath & Georg Nöldeke, 2006. "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown," Working papers 2006/09, Faculty of Business and Economics - University of Basel.
- D40 - Microeconomics - - Market Structure and Pricing - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-05 (All new papers)
- NEP-FMK-2006-08-05 (Financial Markets)
- NEP-MIC-2006-08-05 (Microeconomics)
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