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Information and Economic Efficiency

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  • Richard Arnott
  • Bruce Greenwald
  • Joseph E. Stiglitz

Abstract

Is an economy with adverse selection, moral hazard, or an incomplete set of risk markets "constrained" Pareto efficient? There are two sets of papers addressing this question, one asserting that, under seemingly quite general conditions, the economy is constrained Pareto efficient, the other (to which we have contributed) that it is not. In this paper, we delineate the differences in assumptions between the two sets of papers, and under our assumptions present an intuitive proof of the Pareto inefficiency of market equilibrium with moral hazard and identify what it is that the government can do that the market cannot.

Suggested Citation

  • Richard Arnott & Bruce Greenwald & Joseph E. Stiglitz, 1993. "Information and Economic Efficiency," NBER Working Papers 4533, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4533
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    References listed on IDEAS

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    1. Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, vol. 15(1), pages 1-15, June.
    2. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
    3. Arnott, Richard J & Stiglitz, Joseph E, 1985. "Labor Turnover, Wage Structures, and Moral Hazard: The Inefficiency of Competitive Markets," Journal of Labor Economics, University of Chicago Press, vol. 3(4), pages 434-462, October.
    4. Newbery, David M G & Stiglitz, Joseph E, 1982. "The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 223-246, April.
    5. Steven Shavell, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 541-562.
    6. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
    7. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
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    Citations

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    Cited by:

    1. Stiglitz, Joseph E. & Yun, Jungyoll, 2005. "Integration of unemployment insurance with retirement insurance," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2037-2067, December.
    2. Bel? Jerez, 2000. "General Equilibrium with Asymmetric Information: a Dual Approach," UFAE and IAE Working Papers 510.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    3. Joseph E. Stiglitz, 2002. "Information and the Change in the Paradigm in Economics," American Economic Review, American Economic Association, vol. 92(3), pages 460-501, June.
    4. Belen Jerez, 2005. "Incentive Compatibility and Pricing under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 28-47, January.
    5. Konrad, Kai A., 1999. "Privacy, time consistent optimal labor income taxation and education policy," IZA Discussion Papers 82, Institute for the Study of Labor (IZA).
    6. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2011. "Revisiting Overborrowing and its Policy Implications," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 6, pages 145-184 Central Bank of Chile.
    7. Stein Kristiansen, 2003. "Information Asymmetry and Economic Concentration: The case of hens and eggs in eastern Indonesia," Working Papers 03-21, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations (FAO - ESA).
    8. Benigno, Gianluca & Chen, Huigang & Otrok, Christopher & Rebucci, Alessandro & Young, Eric R., 2013. "Financial crises and macro-prudential policies," Journal of International Economics, Elsevier, vol. 89(2), pages 453-470.
    9. Kherallah, Mylene & Kirsten, Johann F, 2002. "The New Institutional Economics: Applications For Agricultural Policy Research In Developing Countries," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 41(2), June.
    10. Andrew Atkeson & Christian Hellwig & Guillermo Ordoñez, 2015. "Optimal Regulation in the Presence of Reputation Concerns," The Quarterly Journal of Economics, Oxford University Press, vol. 130(1), pages 415-464.
    11. Jerez, Belen, 2003. "A dual characterization of incentive efficiency," Journal of Economic Theory, Elsevier, vol. 112(1), pages 1-34, September.
    12. Thomas Schuster, 2003. "News Events and Price Movements. Price Effects of Economic and Non-Economic Publications in the News Media," Finance 0305009, EconWPA.
    13. Kherallah, Mylène & Kirsten, Johann, 2001. "The new institutional economics," MSSD discussion papers 41, International Food Policy Research Institute (IFPRI).
    14. de la Torre, Augusto & Ize, Alain, 2013. "The foundations of macroprudential regulation : a conceptual roadmap," Policy Research Working Paper Series 6575, The World Bank.
    15. PANACCIONE, Luca, 2006. "Inefficiency of competitive equilibrium with hidden action and financial markets," CORE Discussion Papers 2006096, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    16. Konrad, Kai A., 2001. "Privacy and time-consistent optimal labor income taxation," Journal of Public Economics, Elsevier, vol. 79(3), pages 503-519, March.
    17. Lorenzoni, Guido, 2014. "International Financial Crises," Handbook of International Economics, Elsevier.
    18. Soule, M. J. & Shepherd, K. D., 2000. "An ecological and economic analysis of phosphorus replenishment for Vihiga Division, western Kenya," Agricultural Systems, Elsevier, vol. 64(2), pages 83-98, May.
    19. Stiglitz, J.E., 2015. "Devolution, independence, and the optimal provision of public goods," Economics of Transportation, Elsevier, vol. 4(1), pages 82-94.
    20. Cohen, Solomon I., 2014. "Different institutional behavior in different economic systems: Theory and evidence on diverging systems worldwide," Economic Systems, Elsevier, vol. 38(2), pages 221-242.
    21. Chris Garbers & Guangling Liu, 2017. "Flow specific capital controls for emerging markets," Working Papers 12/2017, Stellenbosch University, Department of Economics.
    22. Gondo, Rocío, 2014. "State Contingent Assets, Financial Crises and Pecuniary Externalities in Models with Collateral Constraints," Working Papers 2014-001, Banco Central de Reserva del Perú.

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