General Equilibrium Model for an Asymmetric Information Economy Without Delivery Upper Bounds

In this paper, we introduce production into the standard general equilibrium model with asymmetric information, which was proposed by Dubey et al. (Cowles Foundation Discussion Paper 2000; Econometrica 2005). In such an economy, there is no rational explanation for producers’ delivery upper bounds while the endowments naturally limit consumers’ deliveries. However, we show that the typical equilibrium allocation of the asymmetric information economy necessarily and substantially depends on such exogenous upper bounds (Example 1 and Theorem 1). In other words, an equilibrium existence theorem without such upper bounds, even if such exists, will typically fail to treat the asymmetric information problem, e.g., the adverse selection problem. Hence, to treat the equilibrium existence problem under the informational asymmetry appropriately, we have to extend the standard model so that the delivery upper bounds need not to be specified explicitly. For this purpose, we propose a quite natural and realistic assumption with respect to the technological condition related to the market delivery, i.e., the existence of some small standardization, commoditization, and/or transaction costs of market deliveries is shown to be sufficient (Theorem 3).