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Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

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Author Info
George J. Mailath (Cowles Foundation, Yale University)
Georg Noldeke (Universitat Bonn)

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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.

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File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1573.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1573.

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Length: 46 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:cwl:cwldpp:1573

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Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Related research
Keywords: Adverse selection; Market breakdown; Separation; Competitive pricing;

Other versions of this item:

Find related papers by JEL classification:
D40 - Microeconomics - - Market Structure and Pricing - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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