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Allocative and Productive Efficiency in REE with Asymmetric Information

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Author Info
Messner, Simon
Vives, Xavier

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Abstract

We characterize the divergence between in 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 o 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, does the market solution not show allocative inefficiency. With multidimensional uncertainty we find that the REE price does not, in general, have the incentive efficient information mix: it pays to sacrifice allocative efficiency at the REE to improve productive efficiency.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2678.

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Date of creation: Jan 2001
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Handle: RePEc:cpr:ceprdp:2678

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

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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  1. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 14-33, June. [Downloadable!] (restricted)
  2. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July. [Downloadable!] (restricted)
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  3. Wolfgang Pesendorfer & Jeroen M. Swinkels, 2000. "Efficiency and Information Aggregation in Auctions," American Economic Review, American Economic Association, vol. 90(3), pages 499-525, June. [Downloadable!] (restricted)
    Other versions:
  4. Creane, Anthony, 1996. "An informational externality in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 331-344, May. [Downloadable!] (restricted)
  5. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February. [Downloadable!] (restricted)
  6. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  7. Laffont, Jean-Jacques M, 1985. "On the Welfare Analysis of Rational Expectations Equilibria with Asymmetric Information," Econometrica, Econometric Society, vol. 53(1), pages 1-29, January. [Downloadable!] (restricted)
  8. Vives, Xavier, 1988. "Aggregation of Information in Large Cournot Markets," Econometrica, Econometric Society, vol. 56(4), pages 851-76, July. [Downloadable!] (restricted)
  9. Blume, Lawrence & Easley, David, 1990. "Implementation of Walrasian expectations equilibria," Journal of Economic Theory, Elsevier, vol. 51(1), pages 207-227, June. [Downloadable!] (restricted)
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  12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  13. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
  14. Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer, vol. 7(2), pages 207-35, February.
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  15. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November. [Downloadable!] (restricted)
  16. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 317-55, July. [Downloadable!] (restricted)
  17. Grossman, Sanford J, 1981. "An Introduction to the Theory of Rational Expectations under Asymmetric Information," Review of Economic Studies, Blackwell Publishing, vol. 48(4), pages 541-59, October. [Downloadable!] (restricted)
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