On Competitive Equilibria with Asymmetric Information
Bernard Salanié () and
François Salanié ()
The B.E. Journal of Theoretical Economics, 2008, vol. 8, issue 1, 1-16
Asymmetric information is widely supposed to impair the functioning of markets. We show that the presence of competition may invalidate this intuition. Consider a market in which principals compete for attracting heterogeneous agents by offering contracts. Suppose contracts are exclusive, and there are constant returns to trade. When the agents' types are publicly observed under mild conditions, competitive equilibria are efficient. Efficiency is also obtained when types are privately observed, provided that principals do not directly care about the agents' private information (the private value case). Thus hidden information only matters in competitive markets if it affects common values.
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