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General Equilibrium with Asymmetric Information: a Dual Approach

  • Bel? Jerez

    ()

We study markets where the characteristics or decisions of certain agents are relevant but not known to their trading partners. Assuming exclusive transactions, the environment is described as a continuum economy with indivisible commodities. We characterize incentive efficient allocations as solutions to linear programming problems and appeal to duality theory to demonstrate the generic existence of external effects in these markets. Because under certain conditions such effects may generate non-convexities, randomization emerges as a theoretic possibility. In characterizing market equilibria we show that, consistently with the personalized nature of transactions, prices are generally non-linear in the underlying consumption. On the other hand, external effects may have critical implications for market efficiency. With adverse selection, in fact, cross-subsidization across agents with different private information may be necessary for optimality, and so, the market need not even achieve an incentive efficient allocation. In contrast, for the case of a single commodity, we find that when informational asymmetries arise after the trading period (e.g. moral hazard; ex post hidden types) external effects are fully internalized at a market equilibrium.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 510.02.

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Length: 47
Date of creation: 02 Apr 2000
Date of revision:
Handle: RePEc:aub:autbar:510.02
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  1. Alejandro M. Manelli & Daniel R. Vincent, 1992. "Optimal Procurement Mechanisms," Discussion Papers 999, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Sun, Yeneng, 1998. "A theory of hyperfinite processes: the complete removal of individual uncertainty via exact LLN1," Journal of Mathematical Economics, Elsevier, vol. 29(4), pages 419-503, May.
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  10. Garratt, Rod & Keister, Todd & Qin, Cheng-Zhong & Shell, Karl, 2002. "Equilibrium Prices When the Sunspot Variable Is Continuous," Journal of Economic Theory, Elsevier, vol. 107(1), pages 11-38, November.
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  12. Karl Shell & Randall Wright, 1991. "Indivisibilities, lotteries, and sunspot equilibria," Staff Report 133, Federal Reserve Bank of Minneapolis.
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  14. Makowski, Louis, 1979. "Value theory with personalized trading," Journal of Economic Theory, Elsevier, vol. 20(2), pages 194-212, April.
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  19. Mas-Colell, Andreu, 1975. "A model of equilibrium with differentiated commodities," Journal of Mathematical Economics, Elsevier, vol. 2(2), pages 263-295.
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