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CK-Equilibria and Informational Efficiency in a Competitive Economy

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Author Info
Gabriel Desgranges (Universite de Cergy-Pontoise)

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Moulin, Herve, 1979. "Dominance Solvable Voting Schemes," Econometrica, Econometric Society, vol. 47(6), pages 1137-51, November. [Downloadable!] (restricted)
  2. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 14-33, June. [Downloadable!] (restricted)
  3. Stephen Morris, . ""Justifying Rational Expectations''," CARESS Working Papres 95-04, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences. [Downloadable!]
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  4. Guesnerie, R. & Rochet, J.C., 1992. "(De)Stabilizing Speculation on Futures Markets: An Alternative View Point," DELTA Working Papers 92-14, DELTA (Ecole normale supérieure).
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  5. 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.
  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. [Downloadable!] (restricted)
  7. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Blackwell Publishing, vol. 60(2), pages 329-47, April. [Downloadable!] (restricted)
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  8. Watson, Joel, 1993. "A "Reputation" Refinement without Equilibrium," Econometrica, Econometric Society, vol. 61(1), pages 199-205, January. [Downloadable!] (restricted)
  9. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May. [Downloadable!] (restricted)
  10. Desgranges, G. & Guesnerie, R., 1996. "Common knowledge and the information revealed through prices: some conjectures," DELTA Working Papers 96-22, DELTA (Ecole normale supérieure).
  11. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March. [Downloadable!] (restricted)
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  12. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, vol. 82(5), pages 1254-78, December. [Downloadable!] (restricted)
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  13. Palfrey, Thomas R. & Srivastava, Sanjay, 1986. "Private information in large economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 34-58, June. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  15. Jayasri Dutta & Stephen Morris, . "The Revelation of Information and Self-Fulfilling Beliefs," Penn CARESS Working Papers 269cceedcbd401a5e46548b88, Penn Economics Department. [Downloadable!]
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  1. Roger Guesnerie, 2008. "Macroeconomic And Monetary Policies From The Eductive Viewpoint," Working Papers Central Bank of Chile 498, Central Bank of Chile. [Downloadable!]
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  2. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Discussion Paper Series dp462, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
  3. Elchanan Ben-Porath, 2007. "Trade with Heterogeneous Beliefs," Levine's Bibliography 122247000000001494, UCLA Department of Economics. [Downloadable!]
  4. Roger Guesnerie & Pedro Jara-Moroni, 2007. "Expectational coordination in a class of economic models: Strategic substitutabilities versus strategic complementarities," PSE Working Papers 2007-28, PSE (Ecole normale supérieure). [Downloadable!]
  5. Roger Guesnerie & Gabriel Desgranges, 2004. "Eductive stable transmission of information though prices: A brief review of results," DELTA Working Papers 2004-23, DELTA (Ecole normale supérieure). [Downloadable!]
  6. Roger Guesnerie, 2005. "Strategic substitutabilities versus strategic complementarities: Towards a general theory of expectational coordination?," PSE Working Papers 2005-07, PSE (Ecole normale supérieure). [Downloadable!]
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