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Extreme Adverse Selection, Competitive Pricing, and Market Breakdown



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

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