THE DUAL ROLE OF EQUILIBRIUM PRICE IN COMPETITIVE ECONOMIES WITH ASYMMETRIC INFORMATION

Dejan Trifunović

Economic Annals, 2008, vol. 53, issue 178-179, 7-43

Abstract: 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).

Keywords: Fully revealing rational expectations equilibrium; Noisy rational expectations equilibrium; Information aggregation; Stock market crashes (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 2008
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