Abstract
When a decentralized asset market is subject to adverse selection, trading of high-quality assets can cease due to self-fulfilling expectations. Following such a partial market freeze, sellers of high-quality assets accumulate in the market. Thus, the average quality of assets on sale increases. On the one hand, this renders buyers more willing to switch to offering high prices, which is a precondition for trade of all assets to resume. But on the other hand, as a buyer is more likely to acquire a high-quality asset, high-valuation holders of low-quality assets may wish to sell their assets and enter the pool of buyers. If additional holders of low-quality assets become sellers, the average quality of assets on sale falls. Consequently, buyers may no longer be willing to offer high prices. Thus, a partial market freeze can be a trap from which no transition path along which all assets are traded exists.