Extreme Adverse Selection, Competitive Pricing, and Market Breakdown

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