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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. Stephen Morris, . ""Justifying Rational Expectations''," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 95-04, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  2. Watson, Joel, 1993. "A "Reputation" Refinement without Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 61(1), pages 199-205, January.
  3. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers, DELTA (Ecole normale supérieure) 1999-06, DELTA (Ecole normale supérieure).
  4. Palfrey, Thomas R. & Srivastava, Sanjay, 1986. "Private information in large economies," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(1), pages 34-58, June.
  5. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 22(3), pages 477-498, June.
  6. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 655-78, May.
  7. Jayasri Dutta & Stephen Morris, . "The Revelation of Information and Self-Fulfilling Beliefs," Penn CARESS Working Papers, Penn Economics Department 269cceedcbd401a5e46548b88, Penn Economics Department.
  8. McAllister, Patrick H., 1990. "Rational behavior and rational expectations," Journal of Economic Theory, Elsevier, Elsevier, vol. 52(2), pages 332-363, December.
  9. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  10. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(2), pages 329-47, April.
  11. DeMarzo, Peter & Skiadas, Costis, 1998. "Aggregation, Determinacy, and Informational Efficiency for a Class of Economies with Asymmetric Information," Journal of Economic Theory, Elsevier, Elsevier, vol. 80(1), pages 123-152, May.
  12. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 82(5), pages 1254-78, December.
  13. Anderson, Robert M. & Sonnenschein, Hugo, 1982. "On the existence of rational expectations equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 26(2), pages 261-278, April.
  14. Moulin, Herve, 1979. "Dominance Solvable Voting Schemes," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1137-51, November.
  15. 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.
  16. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, Elsevier, vol. 39(1), pages 14-33, June.
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Cited by:
  1. Roger Guesnerie & Pedro Jara-Moroni, 2011. "Expectational coordination in simple economic contexts," Economic Theory, Springer, Springer, vol. 47(2), pages 205-246, June.
  2. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Levine's Bibliography 122247000000001494, UCLA Department of Economics.
  3. Jara-Moroni, Pedro, 2012. "Rationalizability in games with a continuum of players," Games and Economic Behavior, Elsevier, Elsevier, vol. 75(2), pages 668-684.
  4. Roger Guesnerie, 2008. "Macroeconomic and monetary policies from the "eductive" viewpoint," PSE Working Papers halshs-00586749, HAL.
  5. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Discussion Paper Series, The Center for the Study of Rationality, Hebrew University, Jerusalem dp462, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  6. repec:hal:wpaper:halshs-00574957 is not listed on IDEAS
  7. repec:hal:wpaper:halshs-00590856 is not listed on IDEAS
  8. repec:hal:wpaper:halshs-00587837 is not listed on IDEAS

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