On the Possibility of Informationally Efficient Markets

61 Pages Posted: 7 Feb 2015 Last revised: 21 Nov 2015

See all articles by Xavier Vives

Xavier Vives

University of Navarra - IESE Business School; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: October 28, 2014

Abstract

This paper presents conditions for a resolution of the Grossman-Stiglitz paradox of informationally efficient markets. We display a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved as long as the correlation in traders' valuations is not too large. The equilibrium is efficient, and the problems associated with fully revealing rational expectations equilibria are precluded without resorting necessarily to noise traders. The robustness of the results to general information structures is established and the effect of market power is examined in a large market approximation to the competitive economy. The model is applied to explain changes in bidding behavior in central bank liquidity auctions in the crisis period.

Keywords: Adverse selection, information acquisition, double auction, multi-unit auctions, rate of convergence, market power, complementarities

JEL Classification: D82, D84, G14, E59

Suggested Citation

Vives, Xavier, On the Possibility of Informationally Efficient Markets (October 28, 2014). IESE Business School Working Paper No. 1104-E, Available at SSRN: https://ssrn.com/abstract=2561253 or http://dx.doi.org/10.2139/ssrn.2561253

Xavier Vives (Contact Author)

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

HOME PAGE: http://wwwapp.iese.edu/faculty/facultyDetail.asp?lang=en&prof=xv

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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