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CK-Equilibria and Informational Efficiency in a Competitive Economy

  • Gabriel Desgranges

    (Universite de Cergy-Pontoise)

We consider a very simple competitive economy with infinitesimal agents and asymmetric information. We define a Common Knowledge (CK hereafter) Equilibrium as a price distribution compatible with CK of market clearing and rationality. At equilibrium, expectational mistakes and incorrect information revelation by price are possible. But, whenever unique, the CK equilibrium is a fully revealing Rational Expectations Equilibrium. Hence uniqueness of equilibrium means market informational efficiency. We give different conditions of uniqueness of equilibrium bearing on the information structure. The first ones emphasize that many informed agents are required for market efficiency. Agents need not be perfectly informed, but each "piece" of information has to be known by a large enough proportion of the population. The main result is a characterization of the information structures allowing for local uniqueness: multiplicity of equilibria obtains when all the agents have to extract information from the price to obtain information about the same event. We show that this result holds in an exchange economy with finitely many goods and generic preferences. Finally, we provide a simple market game in which the CK-equilibria obtain through infinitely repeated elimination of weakly dominated strategies.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1296.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1296
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  1. McAllister, Patrick H., 1990. "Rational behavior and rational expectations," Journal of Economic Theory, Elsevier, vol. 52(2), pages 332-363, December.
  2. Watson, Joel, 1993. "A "Reputation" Refinement without Equilibrium," Econometrica, Econometric Society, vol. 61(1), pages 199-205, January.
  3. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  4. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  5. Palfrey, Thomas R. & Srivastava, Sanjay, 1986. "Private information in large economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 34-58, June.
  6. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
  7. Stephen Morris, . ""Justifying Rational Expectations''," CARESS Working Papres 95-04, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  8. Postlewaite, Andrew & Schmeidler, David, 1986. "Implementation in differential information economies," Journal of Economic Theory, Elsevier, vol. 39(1), pages 14-33, June.
  9. Guesnerie, R., 1989. "An Exploration of the Eductive Justifications of the Rational Expectations Hypotbesis," DELTA Working Papers 89-24, DELTA (Ecole normale supérieure).
  10. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  11. Dutta, Jayasri & Morris, Stephen, 1997. "The Revelation of Information and Self-Fulfilling Beliefs," Journal of Economic Theory, Elsevier, vol. 73(1), pages 231-244, March.
  12. Vives, Xavier, 1993. "How Fast Do Rational Agents Learn?," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 329-47, April.
  13. DeMarzo, Peter & Skiadas, Costis, 1998. "Aggregation, Determinacy, and Informational Efficiency for a Class of Economies with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 80(1), pages 123-152, May.
  14. Anderson, Robert M. & Sonnenschein, Hugo, 1982. "On the existence of rational expectations equilibrium," Journal of Economic Theory, Elsevier, vol. 26(2), pages 261-278, April.
  15. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  16. Moulin, Herve, 1979. "Dominance Solvable Voting Schemes," Econometrica, Econometric Society, vol. 47(6), pages 1137-51, November.
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