EXTREME ADVERSE SELECTION, COMPETITIVE PRICING,AND MARKET BREAKDOWN

Extreme adverse selection arises when private information has unboundedsupport, and market breakdown occurs when no trade is the only equilibriumoutcome. We study extreme adverse selection via the limit behavior of afinancial market as the support of private information converges to an unboundedsupport. A necessary and sufficient condition for market breakdown is obtained. Ifthe condition fails, then there exists competitive market behavior that converges topositive levels of trade whenever it is first best to have trade. When the conditionfails, no feasible (competitive or not) market behavior converges to positive levelsof trade.