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On Price-Taking Behavior in Asymmetric Information Economies

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Author Info
Richard McLean () (Department of Economics, Rutgers University)
James Peck () (Department of Economics, Ohio State University)
Andrew Postlewaite () (Department of Economics, University of Pennsylvania)

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Abstract

It is understood that rational expectations equilibria may not be incentive compatible: agents with private information may be able to affect prices through the information conveyed by their market behavior. We present a simple general equilibrium model to illustrate the connection between the notion of informational size presented in McLean and Postlewaite (2002) and the incentive properties of market equilibria. Specifically, we show that fully revealing market equilibria are not incentive compatible for an economy with few privately informed producers because of the producers’ informational size, but that replicating the economy decreases agents’ informational size. For sufficiently large economies, there exists an incentive compatible fully revealing market equilibrium.

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Publisher Info
Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 04-040.

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Length: 18 pages
Date of creation: 04 Jun 2004
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Handle: RePEc:pen:papers:04-040

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Related research
Keywords: Rational Expectations Equilibria Informational Smallness

Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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  1. Dubey, Pradeep & Mas-Colell, Andreau & Shubik, Martin, 1980. "Efficiency properties of strategies market games: An axiomatic approach," Journal of Economic Theory, Elsevier, vol. 22(2), pages 339-362, April. [Downloadable!] (restricted)
  2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  3. Richard McLean & Andrew Postlewaite, 2002. "Informational Size and Incentive Compatibility," Econometrica, Econometric Society, vol. 70(6), pages 2421-2453, November. [Downloadable!] (restricted)
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  4. Sanford J. Grossman & Joseph E. Stiglitz, 1980. "On the Impossibility of Informationally Efficient Markets," NBER Reprints 0121, National Bureau of Economic Research, Inc.
    Other versions:
  5. Martin Shubik, 1977. "A Theory of Money and Financial Institutions," Cowles Foundation Discussion Papers 462, Cowles Foundation, Yale University. [Downloadable!]
  6. Postlewaite, Andrew & Schmeidler, David, 1981. "Approximate Walrasian Equilibria and Nearby Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 105-11, February. [Downloadable!] (restricted)
  7. Postlewaite, A & Schmeidler, David, 1978. "Approximate Efficiency of Non-Walrasian Nash Equilibria," Econometrica, Econometric Society, vol. 46(1), pages 127-35, January. [Downloadable!] (restricted)
  8. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1982. "Revelation of Information in Strategic Market Games: A Critique of Rational Expectations," Cowles Foundation Discussion Papers 634R, Cowles Foundation, Yale University, revised Nov 1985. [Downloadable!]
  9. James Peck & Matthew O. Jackson, 1999. "Asymmetric information in a competitive market game: Reexamining the implications of rational expectations," Economic Theory, Springer, vol. 13(3), pages 603-628. [Downloadable!] (restricted)
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  10. 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)
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