Question: Consider the following adverse selection problem. There are a large numbers of entrepreneurs each endowed with a project. Projects can be of two types: high

Consider the following adverse selection problem. There are a large numbers of entrepreneurs each endowed with a project. Projects can be of two types: high or low value. High value projects are worth H greater than 0 to external investors and Q, with 0 less than Q less than H, to the entrepreneur. Low quality projects are worth L, with 0 less than L less than H to investors and zero to the entrepreneur. Let p denote the share

Entrepreneurs endowed with low value projects make (weakly) higher profits by selling on the market than those endowed with high value projects.

If , then high quality projects are not traded on the market

Low quality projects are always traded when high quality projects are traded, but the reverse is not necessarily true.

Low quality projects are only traded if high quality projects are also traded

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