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Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?

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Author Info
George J. Mailath () (Department of Economics, University of Pennsylvania)
Georg Noldeke () (Center for Economic Sciences (WWZ), University of Basel)

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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.

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Publisher Info
Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 07-022.

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Length: 41 pages
Date of creation: 30 Jul 2007
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Handle: RePEc:pen:papers:07-022

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Related research
Keywords: Adverse selection; market breakdown; separation; competitive pricing;

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Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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