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Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

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  • Mailath, George J.
  • Nöldeke, Georg

    (University of Basel)

Abstract

Extreme adverse selection arises when private information has unbounded NEWLINE support, and market breakdown occurs when no trade is the only equilibrium NEWLINE outcome. We study extreme adverse selection via the limit behavior of a NEWLINE financial market as the support of private information converges to an unbounded NEWLINE support. A necessary and sufficient condition for market breakdown is obtained. If NEWLINE the condition fails, then there exists competitive market behavior that converges to NEWLINE positive levels of trade whenever it is first best to have trade. When the condition NEWLINE fails, no feasible (competitive or not) market behavior converges to positive levels NEWLINE of trade.

Suggested Citation

  • Mailath, George J. & Nöldeke, Georg, 2006. "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown," Working papers 2006/09, Faculty of Business and Economics - University of Basel.
    • Handle: RePEc:bsl:wpaper:2006/09
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    More about this item

    Keywords

    Adverse selection; market breakdown; separation; competitive pricing;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

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