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Revelation of Information in Strategic Market Games: A Critique of Rational Expectations

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Abstract

We criticize the R.E.E. approach to asymmetric information general equilibrium because it does not explain how information gets "into" the prices. This leads to well-known paradoxes. We suggest a multiperiod game instead, where the flow of information into and out of prices is explicitly modeled. In our game Nash equilibria (N.E.) (1) generalize Walrasian equilibria to asymmetric information; (2) (2) exist generically; (3) eliminate pure speculation; (4) allow prices to reveal information and markets to become more efficient over time; (5) are consistent with the weak efficient markets hypothesis that tracking past prices is not profitable; (6) yet always lead to higher utility for better informed agents (such as experts). Throughout the paper we use one concrete game. In the last section we prove that there are a broad range of games that would have the same properties.

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File URL: http://cowles.econ.yale.edu/P/cd/d06a/d0634-r.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 634R.

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Length: 50 pages
Date of creation: 1982
Date of revision: Nov 1985
Publication status: Published in Journal of Mathematical Economics (1987), 16: 105-137
Handle: RePEc:cwl:cwldpp:634r

Note: CFP 686.
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  1. Pradeep Dubey & Mamoru Kaneko, 1982. "Information About Moves in Extensive Games: II," Cowles Foundation Discussion Papers 629, Cowles Foundation for Research in Economics, Yale University.
  2. Allen, Beth, 1982. "Approximate equilibria in microeconomic rational expectations models," Journal of Economic Theory, Elsevier, vol. 26(2), pages 244-260, April.
  3. 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.
  4. Pradeep Dubey & Martin Shubik, 1979. "A Strategic Market Game with Price and Quantity Strategies," Cowles Foundation Discussion Papers 521, Cowles Foundation for Research in Economics, Yale University.
  5. Blume, Lawrence E. & Easley, David, 1982. "Learning to be rational," Journal of Economic Theory, Elsevier, vol. 26(2), pages 340-351, April.
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Cited by:
  1. Shorish, Jamsheed, 2006. "Functional Rational Expectations Equilibria in Market Games," Economics Series 186, Institute for Advanced Studies.
  2. Beth Allen & James S. Jordan, 1998. "The existence of rational expectations equilibrium: a retrospective," Staff Report 252, Federal Reserve Bank of Minneapolis.
  3. Richard McLean & James Peck & Andrew Postlewaite, 2004. "On Price-Taking Behavior in Asymmetric Information Economies," PIER Working Paper Archive 04-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  4. Matthew O. Jackson & James Peck, 1993. "Costly Information Acquisition," Discussion Papers 1087, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. James Peck & Matthew O. Jackson, 1999. "Asymmetric information in a competitive market game: Reexamining the implications of rational expectations," Economic Theory, Springer, vol. 13(3), pages 603-628.
  6. Martin Shubik, 1993. "The Theory of Money and Financial Institutions," Cowles Foundation Discussion Papers 1056, Cowles Foundation for Research in Economics, Yale University.
  7. Bochet,Olivier, 2005. "Switching from Complete to Incomplete Information," Research Memorandum 035, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.

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