Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection?

George J. Mailath, Georg Noldeke
2007 Social Science Research Network  
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
more » ... nder competitive pricing. There are environments in which the condition holds and others in which it fails.
doi:10.2139/ssrn.1004287 fatcat:vxnnnthee5dbdjpsbjqz7cgbsi