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On Price-Taking Behavior in Asymmetric Information Economies

In: Essays in Dynamic General Equilibrium Theory

Author

Listed:
  • Richard McLean

    (Rutgers University)

  • James Peck

    (The Ohio State University)

  • Andrew Postlewaite

    (University of Pennsylvania)

Abstract

Summary 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.

Suggested Citation

  • Richard McLean & James Peck & Andrew Postlewaite, 2005. "On Price-Taking Behavior in Asymmetric Information Economies," Studies in Economic Theory, in: Alessandro Citanna & John Donaldson & Herakles Polemarchakis & Paolo Siconolfi & Stephan E. Spear (ed.), Essays in Dynamic General Equilibrium Theory, pages 129-142, Springer.
    • Handle: RePEc:spr:steccp:978-3-540-27192-5_6
    DOI: 10.1007/3-540-27192-9_6
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    Cited by:

    1. Ehud Kalai, 2006. "Structural Robustness of Large Games," Discussion Papers 1431, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Peck, James, 2014. "A battle of informed traders and the market game foundations for rational expectations equilibrium," Games and Economic Behavior, Elsevier, vol. 88(C), pages 153-173.

    More about this item

    Keywords

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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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