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General Competitive Analysis with Asymmetric Information

Author

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  • Bisin, A.
  • Gottardi, P.

Abstract

This paper studies competitive equilibria in economics characterized by the presence of asymmetric information (both of the moral hazard and the adverse selection type). We consider economies where non-exclusive contracts (securities) with payoffs dependent on the agents' private information are trade on competitive markets. It is shown that the existence of competitive equilibria is not guaranteed under the same set of assumptions as with symmetric information. The nature of the existence problems is identified and it is shown that it is essentially the same for adverse selection and moral hazard economies : i) agents might have arbitrage opportunities at any price, ii) the market clearing conditions for securities do not guarantee feasibility. To overcome these problems restrictions on trades, and of particular kinds, have to be imposed. This implies that endogenous limits on the set of admissible trades derive from the presence of informational asymmetries. Conditions are presented under which existence of competitive equilibria is established for all economies with asymmetric information. The crucial property of these conditions is that they require some form of separation of buyers and sellers, e;g; a bid-ask spread, in markets with asymmetric information.

Suggested Citation

  • Bisin, A. & Gottardi, P., 1997. "General Competitive Analysis with Asymmetric Information," DELTA Working Papers 97-26, DELTA (Ecole normale supérieure).
    • Handle: RePEc:del:abcdef:97-26
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    Cited by:

    1. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 883-904.
    2. Alberto Bisin & Danilo Guaitoli, 2004. "Moral Hazard and Nonexclusive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 306-328, Summer.
    3. Citanna, Alessandro & Villanacci, Antonio, 2002. "Competitive equilibrium with moral hazard in economies with multiple commodities," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 117-147, September.
    4. Bloise, Gaetano & Reichlin, Pietro, 2005. "Risk and intermediation in a dual financial market economy," Research in Economics, Elsevier, vol. 59(3), pages 257-279, September.
    5. Magill, Michael & Quinzii, Martine, 2008. "Normative properties of stock market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 785-806, July.
    6. Magill, Michael & Quinzii, Martine, 2002. "Capital market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 149-190, September.
    7. Michael Magill, 2000. "Equity, Options and Efficiency in the Presence of Moral Hazard," Econometric Society World Congress 2000 Contributed Papers 1845, Econometric Society.

    More about this item

    Keywords

    INFORMATION;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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