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Does competitive pricing cause market breakdown under extreme adverse selection?

  • Mailath, George J.
  • Nöldeke, Georg

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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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 140 (2008)
Issue (Month): 1 (May)
Pages: 97-125

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Handle: RePEc:eee:jetheo:v:140:y:2008:i:1:p:97-125
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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