Document Type
Discussion Paper
Publication Date
7-1-2006
CFDP Number
1573
CFDP Pages
46
Abstract
Extreme 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.
Recommended Citation
Mailath, George J. and Nöldeke, Georg, "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown" (2006). Cowles Foundation Discussion Papers. 1864.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1864