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Allocative and Productive Efficiency in REE with Asymmetric Information

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  • Vives, Xavier
  • Messner, Simon

Abstract

We characterize the divergence between in informational and economic efficiency in a rational expectations competitive market with asymmetric information about the costs of production. We find that prices may contain too much or too little information with respect o incentive efficient allocations depending on whether the main role of the price is, respectively, the traditional as index of scarcity or informational. Only when REE degenerate to Cournot equilibria, does the market solution not show allocative inefficiency. With multidimensional uncertainty we find that the REE price does not, in general, have the incentive efficient information mix: it pays to sacrifice allocative efficiency at the REE to improve productive efficiency.

Suggested Citation

  • Vives, Xavier & Messner, Simon, 2001. "Allocative and Productive Efficiency in REE with Asymmetric Information," CEPR Discussion Papers 2678, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2678
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    More about this item

    Keywords

    Informational externalities; Supply function equilibria; Rational expectations; Asymmetric information; Mechanism design; Market efficiency;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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