On Price-Taking Behavior in Asymmetric Information Economies

Richard McLean, James Peck and Andrew Postlewaite

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: It is understood that rational expectations equilibria may not be incentive compatible: agents with private information may be able to affect prices through the information conveyed by their market behavior. We present a simple general equilibrium model to illustrate the connection between the notion of informational size presented in McLean and Postlewaite (2002) and the incentive properties of market equilibria. Specifically, we show that fully revealing market equilibria are not incentive compatible for an economy with few privately informed producers because of the producers’ informational size, but that replicating the economy decreases agents’ informational size. For sufficiently large economies, there exists an incentive compatible fully revealing market equilibrium.

Keywords: Rational Expectations Equilibria; Informational Smallness (search for similar items in EconPapers)
JEL-codes: D52 D82 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2004-06-04
New Economics Papers: this item is included in nep-com and nep-mic
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Chapter: On Price-Taking Behavior in Asymmetric Information Economies (2005)
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