Contagious adverse selection

Stephen E. Morris, Hyun Song Shin

Research output: Contribution to journalArticle

26 Scopus citations

Abstract

We illustrate the corrosive effect of even small amounts of adverse selection in an asset market and show how it can lead to the total breakdown of trade. The problem is the failure of "market confidence," defined as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market confidence. We discuss the role of contagious adverse selection and the problem of "toxic assets" in the recent financial crisis.

Original languageEnglish (US)
Pages (from-to)1-21
Number of pages21
JournalAmerican Economic Journal: Macroeconomics
Volume4
Issue number1
DOIs
StatePublished - Jan 1 2012

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

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