Informed Speculation with Imperfect Competition
Competitive rational expectations models have the unsatisfactory property, dubbed the "schizophrenia" problem by M. R. Hellwig, that each trader takes the equilibrium price as given despite the fact that he influences the price. An examination of information aggregation in a noncompetitive rational expectations model, using a Nash equilibrium in demand functions, shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price. Given a distribution of private information across traders, prices reveal less information than in the competition equilibrium, and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral. With small traders, the model may become one of monopolistic competition, not perfect competition. In contrast to the competitive model, a reasonable model of endogenous acquisition of costly private information is obtained, even when traders are risk neutral. Copyright 1989 by The Review of Economic Studies Limited.
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Volume (Year): 56 (1989)
Issue (Month): 3 (July)
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