DP2922 Efficiency Properties of Rational Expectations Equilibria with Asymmetric Information
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.
