Article ID Journal Published Year Pages File Type
957680 Journal of Economic Theory 2008 29 Pages PDF
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.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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