Library Header Image
LSE Research Online LSE Library Services

Efficiency properties of rational expectations equilibria with asymmetric information

Gottardi, Piero and Rahi, Rohit ORCID: 0000-0001-6887-9160 (2001) Efficiency properties of rational expectations equilibria with asymmetric information. Financial Markets Group Discussion Papers (381). Financial Markets Group, The London School of Economics and Political Science, London, UK.

PDF - Published Version
Download (552kB) | Preview


In this paper we provide a characterization of the welfare properties of rational expectations equilibria of economies in which, prior to trading, agents have some information over the realization of uncertainty. We study a model with asymmetrically informed agents, treating symmetric information as a limiting case. Trade takes place in asset markets that may or may not be complete. We show that equilibria are characterized by two forms of inefficiency, price inefficiency and spanning inefficiency, and that generically both of them are present. Price inefficiency arises whenever equilibrium prices reveal some information. It formalizes and generalizes the so-called Hirshleifer effect, by showing that generically an interim Pareto improvement is possible even conditional on the information that is available to agents in equilibrium; the primary source of the inefficiency is a pecuniary externality. Spanning inefficiency, on the other hand, arises if prices are not fully revealing and markets are incomplete relative to the uncertainty faced by agents in equilibrium. In this case, an ex-post improvement can generically be implemented by providing agents with more information, thus expanding their risk-sharing opportunities and reducing informational asymmetries, even though this additional information restricts the set of allocations that are incentive compatible and individually rational.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2001 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
D - Microeconomics > D6 - Welfare Economics > D60 - General
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Date Deposited: 28 Aug 2009 14:01
Last Modified: 16 May 2024 11:26

Actions (login required)

View Item View Item


Downloads per month over past year

View more statistics