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CK-Equilibria and Informational Efficiency in a Competitive Economy

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  • Gabriel Desgranges

    (Universite de Cergy-Pontoise)

Abstract

We consider a very simple competitive economy with infinitesimal agents and asymmetric information. We define a Common Knowledge (CK hereafter) Equilibrium as a price distribution compatible with CK of market clearing and rationality. At equilibrium, expectational mistakes and incorrect information revelation by price are possible. But, whenever unique, the CK equilibrium is a fully revealing Rational Expectations Equilibrium. Hence uniqueness of equilibrium means market informational efficiency. We give different conditions of uniqueness of equilibrium bearing on the information structure. The first ones emphasize that many informed agents are required for market efficiency. Agents need not be perfectly informed, but each "piece" of information has to be known by a large enough proportion of the population. The main result is a characterization of the information structures allowing for local uniqueness: multiplicity of equilibria obtains when all the agents have to extract information from the price to obtain information about the same event. We show that this result holds in an exchange economy with finitely many goods and generic preferences. Finally, we provide a simple market game in which the CK-equilibria obtain through infinitely repeated elimination of weakly dominated strategies.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1296.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1296

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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.
  2. Jayasri Dutta & Stephen Morris, . ""The Revelation of Information and Self-Fulfilling Beliefs''," CARESS Working Papres 95-03, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  3. Palfrey, Thomas R. & Srivastava, Sanjay, 1986. "Private information in large economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 34-58, June.
  4. DeMarzo, Peter & Skiadas, Costis, 1998. "Aggregation, Determinacy, and Informational Efficiency for a Class of Economies with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 80(1), pages 123-152, May.
  5. Guesnerie, R., 1989. "An Exploration of the Eductive Justifications of the Rational Expectations Hypotbesis," DELTA Working Papers 89-24, DELTA (Ecole normale supérieure).
  6. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
  7. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  8. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  9. 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.
  10. J. Watson, 2010. "A ‘Reputation’ Refinement without Equilibrium," Levine's Working Paper Archive 580, David K. Levine.
  11. Stephen Morris, . "Justifying Rational Expectations," Penn CARESS Working Papers 9c26245814018c6e9fadb3767, Penn Economics Department.
  12. Vives, X., 1990. "How Fast Do Rational Agents Learn?," UFAE and IAE Working Papers 135-90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  13. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  14. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  15. Moulin, Herve, 1979. "Dominance Solvable Voting Schemes," Econometrica, Econometric Society, vol. 47(6), pages 1137-51, November.
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Citations

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Cited by:
  1. Roger Guesnerie, 2008. "Macroeconomic And Monetary Policies From The Eductive Viewpoint," Working Papers Central Bank of Chile 498, Central Bank of Chile.
  2. Roger Guesnerie, 2008. "Macroeconomic and monetary policies from the "eductive" viewpoint," Working Papers halshs-00586749, HAL.
  3. Roger Guesnerie & Pedro Jara-Moroni, 2011. "Expectational coordination in simple economic contexts," Economic Theory, Springer, vol. 47(2), pages 205-246, June.
  4. Roger Guesnerie, 2005. "Strategic substitutabilities versus strategic complementarities: Towards a general theory of expectational coordination?," Working Papers halshs-00590856, HAL.
  5. Jara-Moroni, Pedro, 2012. "Rationalizability in games with a continuum of players," Games and Economic Behavior, Elsevier, vol. 75(2), pages 668-684.
  6. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Discussion Paper Series dp462, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  7. Roger Guesnerie & Pedro Jara-Moroni, 2009. "Expectational coordination in simple economic contexts: concepts and analysis with emphasis on strategic substitutabilities," Working Papers halshs-00574957, HAL.
  8. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Levine's Bibliography 122247000000001494, UCLA Department of Economics.
  9. Roger Guesnerie & Pedro Jara-Moroni, 2007. "Expectational coordination in a class of economic models: Strategic substitutabilities versus strategic complementarities," Working Papers halshs-00587837, HAL.

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