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On the Possibility of Informationally Efficient Markets

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Abstract

This paper presents conditions for a resolution of the Grossman-Stiglitz paradox of informationally efficient markets. We display a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved as long as the correlation in traders' valuations is not too large. The equilibrium is efficient, and the problems associated with fully revealing rational expectations equilibria are precluded without resorting necessarily to noise traders. The robustness of the results to general information structures is established and the effect of market power is examined in a large market approximation to the competitive economy. The model is applied to explain changes in bidding behavior in central bank liquidity auctions in the crisis period.

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  • Vives, Xavier, 2014. "On the Possibility of Informationally Efficient Markets," IESE Research Papers D/1104, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-1104
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    More about this item

    Keywords

    Adverse selection; information acquisition; double auction; multi-unit auctions; rate of convergence; market power; complementarities;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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