General Competitive Analysis with Asymmetric Information
AbstractThis paper studies competitive equilibria in economics characterized by the presence of asymmetric information (both of the moral hazard and the adverse selection type). We consider economies where non-exclusive contracts (securities) with payoffs dependent on the agents' private information are trade on competitive markets. It is shown that the existence of competitive equilibria is not guaranteed under the same set of assumptions as with symmetric information. The nature of the existence problems is identified and it is shown that it is essentially the same for adverse selection and moral hazard economies : i) agents might have arbitrage opportunities at any price, ii) the market clearing conditions for securities do not guarantee feasibility. To overcome these problems restrictions on trades, and of particular kinds, have to be imposed. This implies that endogenous limits on the set of admissible trades derive from the presence of informational asymmetries. Conditions are presented under which existence of competitive equilibria is established for all economies with asymmetric information. The crucial property of these conditions is that they require some form of separation of buyers and sellers, e;g; a bid-ask spread, in markets with asymmetric information.
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Bibliographic InfoPaper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 97-26.
Length: 47 pages
Date of creation: 1997
Date of revision:
Publication status: Published in Journal of Economic Theory, 1999, vol. 87, no. 1, pp. 1-48
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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