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Strongly Rational Expectations Equilibria,Endogenous Acquisition of Information and the Grossman–Stiglitz Paradox

  • Gabriel Desgranges

    ()

    (THEMA, University of Cergy-Pontoise)

  • Maik Heinemann

    ()

    (University of Lüneburg, Institute of Economics)

This paper analyzes conditions for strong rationality of the equilibrium in a linear/Gaussian model of a competitive commodity market, where firms are differentially informed about costs of production and the precision of private information is endogenously acquired. A Rational Expectations Equilibrium is said to be Strongly Rational, or eductively Stable, (SREE) when it is the unique rationalizable outcome. A locally SREE exists when the informativeness of the price is below a threshold that is increasing in the informativeness of private information and the elasticity of marginal cost of information acquisition. In the spirit of the Grossman Stiglitz paradox, informativeness of the SREE price is bounded. In the case with constant marginal costs, we characterize the set of rationalizable information precisions. Furthermore, a SREE requires that marginal costs of information are neither too low nor too large. Exogenous public information always favors stability.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-25.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-25
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  1. D. B. Bernheim, 2010. "Rationalizable Strategic Behavior," Levine's Working Paper Archive 661465000000000381, David K. Levine.
  2. Barlevy, Gadi & Veronesi, Pietro, 2000. "Information Acquisition in Financial Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(1), pages 79-90, January.
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  9. Laura Veldkamp, 2004. "Information Markets and the Comovement of Asset Prices," Working Papers 04-18, New York University, Leonard N. Stern School of Business, Department of Economics.
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  11. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
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  13. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-30, November.
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  15. Chamley, Christophe, 2007. "Complementarities in information acquisition with short-term trades," Theoretical Economics, Econometric Society, vol. 2(4), December.
  16. Maik Heinemann, 2002. "Existence of Strongly Rational Expectations Equilibria on Asset Markets with Asymmetric Information," Computing in Economics and Finance 2002 57, Society for Computational Economics.
  17. Guesnerie, R., 1989. "An Exploration of the Eductive Justifications of the Rational Expectations Hypotbesis," DELTA Working Papers 89-24, DELTA (Ecole normale supérieure).
  18. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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