DP2678 Allocative and Productive Efficiency in REE with Asymmetric Information

Author(s):	Simon Messner, Xavier Vives
Publication Date:	January 2001
Keyword(s):	Asymmetric Information, Informational Externalities, Market Efficiency, Mechanism Design, Rational Expectations, Supply Function Equilibria
JEL(s):	D82, L13, L40
Programme Areas:	Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2678

We characterize the divergence between in informational and economic efficiency in a rational expectations competitive market with asymmetric information about the costs of production. We find that prices may contain too much or too little information with respect o incentive efficient allocations depending on whether the main role of the price is, respectively, the traditional as index of scarcity or informational. Only when REE degenerate to Cournot equilibria, does the market solution not show allocative inefficiency. With multidimensional uncertainty we find that the REE price does not, in general, have the incentive efficient information mix: it pays to sacrifice allocative efficiency at the REE to improve productive efficiency.