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Strongly Rational Expectations Equilibria,Endogenous Acquisition of Information and the Grossman–Stiglitz Paradox

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  • Gabriel Desgranges

    ()
    (THEMA, University of Cergy-Pontoise)

  • Maik Heinemann

    ()
    (University of Lüneburg, Institute of Economics)

Abstract

This paper analyzes conditions for strong rationality of the equilibrium in a linear/Gaussian model of a competitive commodity market, where firms are differentially informed about costs of production and the precision of private information is endogenously acquired. A Rational Expectations Equilibrium is said to be Strongly Rational, or eductively Stable, (SREE) when it is the unique rationalizable outcome. A locally SREE exists when the informativeness of the price is below a threshold that is increasing in the informativeness of private information and the elasticity of marginal cost of information acquisition. In the spirit of the Grossman Stiglitz paradox, informativeness of the SREE price is bounded. In the case with constant marginal costs, we characterize the set of rationalizable information precisions. Furthermore, a SREE requires that marginal costs of information are neither too low nor too large. Exogenous public information always favors stability.

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Bibliographic Info

Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-25.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-25

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Related research

Keywords: Rational Expectations; Eductive Stability; Asymmetric Information; Information Acquisition.;

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  1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 587-97, June.
  2. Gabriel Desgranges & Pierre-Yves Geoffard & Roger Guesnerie, 2003. "Do Prices Transmit Rationally Expected Information?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 1(1), pages 124-153, 03.
  3. Maik Heinemann, 2002. "Existence of Strongly Rational Expectations Equilibria on Asset Markets with Asymmetric Information," Computing in Economics and Finance 2002, Society for Computational Economics 57, Society for Computational Economics.
  4. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 96(5), pages 1769-1787, December.
  5. 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.
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  8. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, Econometric Society, vol. 75(4), pages 1103-1142, 07.
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  10. Gadi Barlevy & Pietro Veronesi, . "Information Acquisition in Financial Markets," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 360, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. D. B. Bernheim, 2010. "Rationalizable Strategic Behavior," Levine's Working Paper Archive 514, David K. Levine.
  12. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1521-1534, December.
  13. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 393-408, June.
  14. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, Econometric Society, vol. 70(2), pages 439-480, March.
  15. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, Econometric Society, vol. 52(4), pages 1029-50, July.
  16. Hellwig, Christian, 2002. "Public Information, Private Information, and the Multiplicity of Equilibria in Coordination Games," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(2), pages 191-222, December.
  17. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1415-30, November.
  18. Chamley, Christophe, 2007. "Complementarities in information acquisition with short-term trades," Theoretical Economics, Econometric Society, Econometric Society, vol. 2(4), December.
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