We investigate extensions of the classic Rothschild and Stiglitz (1976) (RS) model of adverse selection under asymmetric information. In RS, low-risk customers are worse off owing to an externality created by high-risk buyers in the market. We find critical changes in insurance buyers' behavior under the joint assumptions of transaction costs and buyer heterogeneity with respect to either risk aversion or wealth. Combining transaction costs and heterogeneity, we find a separating equilibrium in which neither high-risk nor low-risk individuals are penalized due to information asymmetry. Copyright The Journal of Risk and Insurance, 2007.

The value of specialist assistance to the trading of low-volume stocks has important implications in exchange design. We study the relation between the structure of individual specialist portfolios and the transitory volatility of low-volume stocks in these portfolios under the traditional NYSE auction-dealer market structure. We find that the trading quality for inactive stocks is positively related to the trading volume of active stocks in the same specialist portfolios. These results are consistent with specialist subsidization of low-volume stocks in their portfolios and suggest that specialists provide important support to the trading of inactive stocks if they have the resources. Copyright (c) 2009, The Eastern Finance Association.

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