On Price-Taking Behavior in Asymmetric Information Economies

18 Pages Posted: 18 Oct 2004

See all articles by Richard P. McLean

Richard P. McLean

Rutgers University - Department of Economics

James Peck

Ohio State University (OSU) - Economics

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Date Written: June 2004

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 Expections Equilibria, Informational Smallness

JEL Classification: D52, D82

Suggested Citation

McLean, Richard P. and Peck, James D. and Postlewaite, Andrew, On Price-Taking Behavior in Asymmetric Information Economies (June 2004). PIER Working Paper No. 04-040, Available at SSRN: https://ssrn.com/abstract=606441 or http://dx.doi.org/10.2139/ssrn.606441

Richard P. McLean (Contact Author)

Rutgers University - Department of Economics ( email )

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James D. Peck

Ohio State University (OSU) - Economics ( email )

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Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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United States
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215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

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