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Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?

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  • George J. Mailath

    ()
    (Department of Economics, University of Pennsylvania)

  • Georg Noldeke

    ()
    (Center for Economic Sciences (WWZ), University of Basel)

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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Bibliographic 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
Date of revision:
Handle: RePEc:pen:papers:07-022

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

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Cited by:
  1. Adriani, Fabrizio & Deidda, Luca G., 2009. "Price signaling and the strategic benefits of price rigidities," Games and Economic Behavior, Elsevier, Elsevier, vol. 67(2), pages 335-350, November.
  2. Mailath, George J. & Thadden, Ernst-Ludwig von, 2013. "Incentive Compatibility and Differentiability New Results and Classic Applications," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 447, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Daniel L. McFadden & Carlos E. Noton & Pau Olivella, 2012. "Remedies for Sick Insurance," NBER Working Papers 17938, National Bureau of Economic Research, Inc.
  4. Nathaniel Hendren, 2012. "Private Information and Insurance Rejections," NBER Working Papers 18282, National Bureau of Economic Research, Inc.

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