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Does competitive pricing cause market breakdown under extreme adverse selection?

Authors
Journal
Journal of Economic Theory
0022-0531
Publisher
Elsevier
Publication Date
Volume
140
Issue
1
Identifiers
DOI: 10.1016/j.jet.2007.08.001
Keywords
  • Adverse Selection
  • Market Breakdown
  • Separation
  • Competitive Pricing

Abstract

Abstract We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.

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