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A large-market rational expectations equilibrium model

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  • Vives, Xavier

    ()
    (IESE Business School)

Abstract

This paper presents a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved. The equilibrium is efficient, and the paradoxes associated with fully revealing rational expectations equilibria are precluded without resorting to noise traders. The rate at which equilibria in finite replica markets with n traders approach the equilibrium in the continuum economy is 1 n , slower than the rate of convergence to price-taking behavior (1 n ); and the per capita welfare loss is dissipated at the rate 1 n , slower than the rate at which inefficiency due to market power vanishes (1 n2 ). The model admits a einterpretation in which behavioral traders coexist with rational traders, and it allows us to characterize the amount of induced mispricing.

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Bibliographic Info

Paper provided by IESE Business School in its series IESE Research Papers with number D/924.

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Length: 38 pages
Date of creation: 07 May 2011
Date of revision:
Handle: RePEc:ebg:iesewp:d-0924

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/
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Related research

Keywords: adverse selection; information acquisition; double auction; multi-unit auctions; rate convergence; behavioral traders; complementarities;

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  1. Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2006. "Declining valuations and equilibrium bidding in central bank refinancing operations," Working Paper Series 0668, European Central Bank.
  2. Kjell G. Nyborg & Ulrich Bindseil & Ilya A. Strebulaev, 2005. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," Working Papers 2005.92, Fondazione Eni Enrico Mattei.
  3. Vives, Xavier, 2008. "Strategic Supply Function Competition with Private Information," CEPR Discussion Papers 6960, C.E.P.R. Discussion Papers.
  4. Wolfgang Pesendorfer & Jeroen M. Swinkels, 1997. "The Loser's Curse and Information Aggregation in Common Value Auctions," Econometrica, Econometric Society, vol. 65(6), pages 1247-1282, November.
  5. Blume, Lawrence & Easley, David, 1990. "Implementation of Walrasian expectations equilibria," Journal of Economic Theory, Elsevier, vol. 51(1), pages 207-227, June.
  6. Nuno Cassola & Ali Hortacsu & Jakub Kastl, 2009. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds," NBER Working Papers 15158, National Bureau of Economic Research, Inc.
  7. Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-15, September.
  8. Philip J Reny & Motty Perry, 2006. "Toward a Strategic Foundation for Rational Expectations Equilibrium," Econometrica, Econometric Society, vol. 74(5), pages 1231-1269, 09.
  9. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
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