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Allocative and Productive Efficiency in REE with Asymetric Information

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  • XAVIER VIVES

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Abstract

We characterize the divergence between informational and economic efficiency in a rational expectations competitive market with asymmetric information about the costs of production. We find that prices may contain too much or too little information with respect to incentive efficient allocations depending on whether the main role of the price is, respectively, the traditional as index of scarcity or informational. Only when REE degenerate to Cournot equilibria the market solution does not show llocative inefficiency. With multidimensional uncertainty we find that the REE price does not have in general the incentive efficient information mix: It pays to sacrifice allocative efficiency at the REE to improve productive efficiency.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 473.00.

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Length: 43
Date of creation: 11 Nov 2000
Date of revision:
Handle: RePEc:aub:autbar:473.00

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Keywords: Informational Externalities; Supply Function Equilibria; Rational Expectations; Asymmetric Information; Mechanism Design; Market Efficiency;

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  1. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
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  4. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, David K. Levine.
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  6. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  15. Palfrey, Thomas R. & Srivastava, Sanjay, 1986. "Private information in large economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 34-58, June.
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  17. Anderson, Robert M. & Sonnenschein, Hugo, 1982. "On the existence of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 261-278, April.
  18. Rob, Rafael, 1987. "Entry, Fixed Costs and the Aggregation of Private Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(4), pages 619-30, October.
  19. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, Econometric Society, vol. 56(4), pages 851-76, July.
  20. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
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