Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WWZ Discussion Paper ; No. 2006/09

Classification and Topics

• Classification: Wirtschaft ; Market Structure, Pricing, and Design: General ; Asymmetric and Private Information; Mechanism Design ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: Adverse selection ; market breakdown ; separation ; competitive pricing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mailath, George J. ; Nöldeke, Georg
• Event: Veröffentlichung
• (who): University of Basel, Center of Business and Economics (WWZ)
• (where): Basel
• (when): 2006

Further information

• DOI: doi:10.5451/unibas-ep61249
• Handle: http://hdl.handle.net/10419/123365
• Last update: 10.03.2025, 11:43 AM CET