The dual role of equilibrium price in competitive economies with asymmetric information

This paper analyses equilibrium in competitive markets with asymmetrically informed agents. In contrast to Walrasian equilibrium, where equilibrium price is only an indicator of relative scarcity, in the models studied in this paper equilibrium price has two additional roles. It conveys and aggregates the private information of agents in the economy. Each agent infers the private information of other agents by studying the equilibrium price. This implies that agents in this setting have higher cognitive capabilities than Walrasian agents. The equilibrium concept used to describe these additional roles of equilibrium price is called Rational Expectations Equilibrium (REE).

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Transaction Risk, Derivative Assets, and Equilibrium

Quarterly Journal of Finance ◽

10.1142/s2010139216500014 ◽

2016 ◽

Vol 06 (01) ◽

pp. 1650001 ◽

Cited By ~ 1

Author(s):

H. Henry Cao ◽

Dongyan Ye

Keyword(s):

Asymmetric Information ◽

Social Welfare ◽

Private Information ◽

Asset Prices ◽

Rational Expectations ◽

State Variables ◽

Underlying Asset ◽

Market State

We describe a rational expectations model in which there is not only asymmetric information about payoffs but also asymmetric information about the preference, proportion and precision of private information of investors. We define this payoff-irrelevant risk as transaction risk, which is described by market state variables unrelated to payoffs. When derivative assets are introduced, the prices of the derivative assets can reveal information about transaction risk. Due to the informational role of derivative-asset prices, introducing derivative assets can increase social welfare and the price of the underlying asset even though no investors are trading in these derivative assets.

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The Dual Role of (Private) Information and its Effect on Value Premium

SSRN Electronic Journal ◽

10.2139/ssrn.1787016 ◽

2011 ◽

Author(s):

Qiang Kang ◽

Lixin Huang

Keyword(s):

Private Information ◽

Dual Role ◽

Value Premium

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Signalling, Information and Consumer Fraud

Games ◽

10.3390/g11030029 ◽

2020 ◽

Vol 11 (3) ◽

pp. 29

Author(s):

Silvia Martinez-Gorricho

Keyword(s):

Asymmetric Information ◽

Private Information ◽

Common Knowledge ◽

Market Price ◽

High Price ◽

Pareto Improvement ◽

The Public ◽

Quality Product ◽

Parameter Values

In a two-sided asymmetric information market, the role of the accuracy of consumers’ imperfect and private information on the level of fraud, incidence of fraud and trade under price rigidity is examined. Consumers receive a costless but noisy private signal of quality. The product offered in the market can be of two exogenously given qualities and it is common knowledge that the consumer is not willing to pay a high price for a low quality product. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We show that equilibria involving fraud exist for all parameter values. Furthermore, for some parameter values, we find that -in equilibrium- a higher precision of consumers’ private information leads to higher levels of fraud and incidence of fraud, reducing consumers’ welfare. We provide conditions for the public revelation of consumers’ private information to be a Pareto improvement.

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Distinguished Fellow: Honoring Roy Radner

The Journal of Economic Perspectives ◽

10.1257/jep.6.1.181 ◽

1992 ◽

Vol 6 (1) ◽

pp. 181-194

Author(s):

Frank Hahn

Keyword(s):

General Equilibrium ◽

Private Information ◽

Rational Expectations ◽

Equilibrium Theory ◽

American Economic Association ◽

General Equilibrium Theory ◽

Rational Expectations Equilibrium ◽

Turnpike Theorem ◽

Economic Association ◽

Game Theoretic

Roy Radner has been elected a Distinguished Fellow of the American Economic Association. To illustrate the Radner style, I have chosen the example of his turnpike theorem, even though this is not quite illustrative of his central concerns. I shall follow this with a brief survey of his contributions to general equilibrium theory and the theory of rational expectations equilibrium. I shall then turn to his work on teams, and conclude with one of his more game-theoretic studies of organizations and private information.

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