Extreme Adverse Selection, Competitive Pricing, and Market Breakdown
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.
Mailath, George J. and Nöldeke, Georg, "Extreme Adverse Selection, Competitive Pricing, and Market Breakdown" (2006). Cowles Foundation Discussion Papers. 1864.