extrinsic uncertainty and the informational role of prices abstract we study a financial economy with finitely many states of private information there are two agents informed and uninformed we define agents expectations on future equilibrium prices as a probability distribution over k distinct values i e we introduce k extrinsic events we show that there are open sets of economies with nonrevealing and also with partially revealing equilibria for an appropriate choice of self fulfilling price expectations observable equilibrium prices are signal invariant journal of economic literature classification numbers d52 d82 d84

sentiments and aggregate demand fluctuations we formalize the keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations when production decisions must be made under imperfect information about demand optimal decisions based on sentiments can generate stochastic self fulfilling rational expectations equilibria in standard economies without persistent informational frictions externalities nonconvexities or strategic complementarities in production the models we consider are deliberately simple but could serve as benchmarks for more complicated equilibrium models with additional features

a class of monotone economies in which rational expectations equilibria exist but prices do not reveal all information abstract some economies having excess demands which depend monotonically on agents information signals are examined if there are no multiple market clearing prices then these economies have strict rational expectations equilibria in which equilibrium prices alone do not transmit all information

limit theorems for markets with sequential bargaining this paper models trade as a non coopertative strategic game played at an inlinite sequence of dates a single indivisible commodity is traded buyers and sellers have transferable utility and are characterized by their reservation utilities they meet at random and bargain over the price at which a single unit of the good will be exchanged under a variety of circumstances it is shown that as the costs of search and bargaining become negligible the outcome of the game converges to the competitve flow equilibrium even when there is complete information journal of economic literature classification numbers 022 19x7

screening market signalling and capital structure theory this paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approaches the model is developed in the context of a capital market setting in which bondholders produce costly information about a firm s a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm given this schedule the firm s optimal choices of debt equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm s earnings distribution our objectives in this paper are threefold first we discuss an alternative equilibrium mechanism for resolving the informational asymmetry problem in a lemons type market in which some agents are a priori better informed than others this mechanism recently proposed by thakor 19 is distinct from and yet integrates the salient features of the screening see stiglitz 17 and viscusi 21 and signalling bhattacharya 41 paradigms second we demonstrate that the equilibrium notion developed is relevant to the determination of an interior optimal capital structure for a firm in a world of imperfect information this application of our model involves firms with intertemporally distributed cashflows which vary cross sectionally and are not necessarily independent and identically distributed i i d through time we use this multiperiod setting to address our third objective which is to explain a firm s debt maturity decision essentially our argument is that when both the size and timing of a firm s future earnings are indistinguishable ex ante from other firms in the economy the firm s capital structure and debt maturity choices could simultaneously function as signals of these a priori unknown parameters of its earnings the market structure we consider is similar to that in thakor 19 there are sellers each of whom offers a variety of products with qualities dependent upon a common set of exogenous attributes unique to the seller and buyers who are unaware of these attributes buyers interested in one of the products offered

computational economics and economic theory substitutes or complements abstract this essay examines the idea and potential of a computational approach to theory discusses methodological issues raised by such computational methods and outlines the problems associated with the dissemination of computational methods and the exposition of computational results we argue that the study of a theory need not be confined to proving theorems that current and future computer technologies create new possibilities for theoretical analysis and that by resolving these issues we will create an intellectual atmosphere in which computational methods can make substantial contributions to economic analysis

the leisure bias in cost benefit analyses of employment and training programs although increases in earnings that result from employment and training e t programs typically come at the cost of losses of leisure to participants this is almost never taken into account in cost benefit analyses of e t programs this paper develops a method for adjusting for this bias and illustrates how the method can be used to reassess findings from earlier e t cost benefit analyses results in the paper suggest that the bias from ignoring lost leisure is likely to be sizable unless the e t program that is subject to cost benefit analysis increases earnings mainly by raising wage rates or participant reservation wages are near zero ignoring the bias will favor e t programs that emphasize increases in hours of work by focusing on job search or work requirements at the expense of programs that increase wage rates through investments in human capital

rational expectations in microeconomic models an overview abstract this paper is an expository introduction to several topics of current research in the general equilibrium theory of rational expectations more specifically we discuss the existence of exact and approximate rational expectations equilibria the implementation of equilibria the behavior of learning and smoothing processes by which traders construct expectations from repeated observations of the market and the lagged use of the information revealed by prices in an intertemporal sequence of markets the purpose of this discussion is to introduce papers on these topics appearing in the journal of economic theory symposium on rational expectations in microeconomic models

strict rational expectations equilibria with diffuseness abstract for smooth static pure exchange economies under uncertainty it is shown that a diffuseness condition on the distribution of traders characteristics as the state of the world varies permits one to use only a weak dimensionality restriction in the proof of the genericity of existence of strict rational expectations equilibria a generic result on the amount of information conveyed by equilibrium price functions and comparisons with some examples of nonexistence are given

on the possibility of informationally efficient markets 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 jel d82 d84 g14 e59

dynamic matching and bargaining games a general approach this paper presents a new characterization result for competitive allocations in quasilinear economies this result is informed by the analysis of non cooperative dynamic search and bargaining games such games provide models of decentralized markets with trading frictions a central objective of this literature is to investigate how equilibrium outcomes depend on the level of the frictions in particular does the trading outcome become walrasian when frictions become small existing specifications of such games provide divergent answers the characterization result is used to investigate what causes these differences and to generalize insights from the analysis of specific search and bargaining games

aggregation determinacy and informational efficiency for a class of economies with asymmetric information abstract we identify and analyze a class of economies with asymmetric information that we call quasi complete for quasi complete economies we determine equilibrium trades show that the set of fully informative equilibria is a singleton and give necessary and sufficient conditions for the existence of partially informative equilibria besides unifying some familiar settings such as those of grossman 1976 and milgrom and stokey 1982 the following new results are proved a the same restrictions that deliver gorman aggregation under symmetric information are sufficient for gorman aggregation under asymmetric information even under partially informative prices b the traditional assumptions of quadratic utilities and endowment spanning that result in the capm under symmetric information deliver a conditional capm under asymmetric information with prices that need not be fully informative c the linear equilibrium in grossman s 1976 model is the only equilibrium linear or not while minor changes in the normality assumptions result in indeterminacy and partially informative equilibria and d if there is no aggregate endowment risk asymmetrically informed agents with common priors sell the risky part of their endowment in every equilibrium journal of economic literature classification numbers d82 g14 c62

time and uncertainty in overlapping generations economies this paper shows the general reversibility of every perfect foresight equilibrium of an overlapping generations economy it then shows and characterizes the exist ence of reversible sunspot equilibria in these economies as well which seems to be at odds with our intuition about the irreversibility of a tree of events although the paper establishes also that such reversible stochastic equilibria constitute a negligible subset of all the equilibria of their class their mere existence may be considered somewhat puzzling for this intuition

on existence and uniqueness of equilibrium in a class of noisy rational expectations models i study a general class of noisy rational expectations models that nests the standard grossman and stiglitz 1980 and hellwig 1980 models but relaxes the usual assumption of joint normality of asset pay offs and supply and allows for more general signal structures i provide a constructive proof of existence of equilibrium characterize the price function and provide sufficient conditions for uniqueness within the class of equilibria with continuous price functions which are met by both the grossman and stiglitz 1980 models and the hellwig 1980 models with a continuum of investors my solution approach does not rely on the typical conjecture and verify method and i exhibit a number of non normal examples in which asset prices can be characterized explicitly and in a closed form the results presented here open up a broad class of models for applied work to illustrate the usefulness of generalizing the standard model i show that in settings with non normally distributed pay offs shocks to fundamentals may be amplified purely due to learning effects price drifts can arise naturally and the disagreement return relation depends in a novel way on return skewness

the rate of convergence to perfect competition of matching and bargaining mechanisms abstract we study the steady state of a market with incoming cohorts of buyers and sellers who are matched pairwise and bargain under private information a friction parameter is the length of the time period until the next meeting we provide a necessary and sufficient condition for the convergence of mechanism outcomes to perfect competition at the linear rate in which is shown to be the fastest possible among all bargaining mechanisms the condition requires that buyers and sellers always retain some bargaining power the bargaining mechanisms that satisfy this condition are called nonvanishing bargaining power nbp mechanisms simple random proposer take it or leave it protocols are nbp while k double auctions k da are not we find that k das have equilibria that converge to perfect competition at a linear rate converge at a slower rate or even do not converge at all

markets correlation and regret matching inspired by the existing work on correlated equilibria and regretbased dynamics in games we carry out a first exploration of the links between the leading equilibrium concept for exchange economies walrasian equilibrium and the dynamics specifically regret matching dynamics of trading games that fit the economic structure and have the property that their pure nash equilibria implement the walrasian outcomes interestingly in the case of quasilinear utilities or transferable utility all the concepts essentially coincide and we get simple deterministic dynamics converging to walrasian outcomes connections to sunspot equilibria are also studied

the loser s curse and information aggregation in common value auctions we consider an auction in which k identical objects of unknown value are auctioned off to n bidders the k highest bidders get an object and pay the k 1st bid bidders receive a signal that provides information about the value of the object we characterize the unique symmetric equilibrium of this auction we then consider a sequence of auctions a r with n r bidders and k r objects we show that price converges in probability to the true value of the object if and only if both k r and n r k r i e both the number of objects and the number of bidders who do not receive an object go to infinity

dynamic matching two sided incomplete information and participation costs existence and convergence to perfect competition consider a decentralized dynamic market with an infinite horizon and participation costs in which both buyers and sellers have private information concerning their values for the indivisible traded good time is discrete each period has length and each unit of time continuums of new buyers and sellers consider entry traders whose expected utility is negative choose not to enter within a period each buyer is matched anonymously with a seller and each seller is matched with zero one or more buyers every seller runs a first price auction with a reservation price and if trade occurs both the seller and the winning buyer exit the market with their realized utility traders who fail to trade continue in the market to be rematched we characterize the steady state equilibria that are perfect bayesian we show that as converges to zero equilibrium prices at which trades occur converge to the walrasian price and the realized allocations converge to the competitive allocation we also show the existence of equilibria for sufficiently small provided the discount rate is small relative to the participation

an equilibrium analysis of information aggregation and fluctuations in markets with discrete decisions abstract this paper shows how the interaction between decentralized information gathering and discreteness of investment decisions at the individual level can generate random fluctuations in aggregate investment that involve occasionally large allocation errors this interaction is illustrated in a model in which private information is costly to acquire and prices reveal information the unique rational expectations equilibrium outcome of the model is shown to always be noisy and characterized by investment levels which may be high simply because uninformed investors are buying under the impression that the high price is a signal of good investment opportunities

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

adverse selection and security design this paper studies the problem of optimal security design by a privately informed entrepreneur in the context of a simple parametric model it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage the reason is that with rational uninformed outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider this is true whether or not she has market power in trading the asset consider a risk averse entrepreneur who is contemplating what security to issue the entrepreneur anticipates that during subsequent trading in the secondary market she will have private information on the payoff of her investment as well as on other risks in the economy the design of the asset is therefore influenced not only by a desire to share risk but also by informational considerations involving the potential for insider trading profits this paper studies the problem of optimal security design in the context of a simple parametric model with gaussian risks and cara utility trading in the secondary market is modelled via the static reduced form concept of rational expectations equilibrium in which uninformed outside investors use market prices to try to infer the private information of the entrepreneur or insider as she will sometimes be called it is shown that the entrepreneur does not find it profitable to float an asset that affords her an informational advantage an optimal asset entails a fully revealing rational expectations equilibrium and is perfectly correlated with the issuer s endowment risk the reason is that with rational outside investors the entrepreneur faces adverse selection in the security market which prevents her from exploiting her position as an insider she is better off foregoing her informational advantage and concentrating on her hedging motive alone in the particular setting described in the paper equity2 is an optimal asset since the entrepreneur has no privileged information regarding its payoff and it allows efficient risk sharing the issue of security design when prices have an informational role to play is just beginning to be researched closely related to this paper is the work of demange and laroque 1995 who use a competitive rational expectations model with noise traders to analyse the problem posed above except for some special cases however they are able to get only numerical results in comparison the present paper obtains partially revealing equilibria in a model in which all agents are rational furthermore demange and laroque

on the core of an economy with differential information abstract we show that the fine core of an atomless exchange economy with differential information is a subset of the ex post core of the economy this inclusion may be proper and it does not hold for economies with a finite number of traders consequently every fine core allocation is a selection from the equilibrium corre spondence of the associated family of full information economies moreover when each trader knows his or her own utility function and his of her own endowment every fine core allocation is a rational expectations equilibrium allocation journal of economic literature classification numbers c72 d50

market uncertainty correlated and sunspot equilibria in imperfectly competitive economies first version received june 1988 final version accepted november 1990 eds an imperfectly competitive economy is very prone to market uncertainty including uncertainty about the liquidity or thickness of markets we show in particular that there exist stochastic equilibrium outcomes in nonstochastic market games if and only if the endowments are not pareto optimal we also provide a link between extrinsic uncertainty arising in games e g correlated equilibria and extrinsic uncertainty in market economies e g sunspot equilibria a correlated equilibria to the market game is either a sunspot equilibrium or a non sunspot equilibrium to the related securities games but the converse is not true in general

correlated equilibrium as an expression of bayesian rationality if it is common knowledge that the players in a game are bayesian utility maximizers who treat uncertainty about other players actions like any other uncertainty then the outcome is necessarily a correlated equilibrium random strategies appear as an expression of each player s uncertainty about what the others will do not as the result of willful randomization use is made of the common prior assumption according to which differences in probability assessments by different individuals are due to the different information that they have where information may be interpreted broadly to include experience upbringing and genetic makeup copyright 1987 by the econometric society

private information and sunspots in sequential asset markets we study a model where some agents have private information about risky asset returns and trade to obtain capital gains while others acquire the risky asset and hold it to maturity forming expectations of returns based on market prices we show that under such a structure in addition to fully revealing rational expectations equilibria there exists a continuum of equilibrium prices consistent with rational expectations where the asset prices are subject to sunspot shocks such sunspot shocks can generate persistent uctuations in asset prices that look like a random walk in an e cient market

monetary economics a review essay in this essay i define money to be whatever objects serve as generally acceptable media of exchange and i define monetary economics to be the study of the causes and economic consequences of the monetization of exchange that is of the use of media of exchange these definitions lead me to specify the distinctive objectives of monetary economics to be to understand 1 the monetization of exchange and its relation to the technologies of production and of exchange 2 the form that money takes and especially the viability of fiat money 3 the determination and significance of the real value of units of money and 4 the relation between the nominal quantity of money and aggregate economic activity the essay tries to acquaint the reader with the contents of the recently published handbook of monetary economic as they relate to these objectives of monetary economics and offer some critical thoughts on selected unsettled issues in monetary economics that my reading of the handbook suggested this abstract was borrowed from another version of this item

trade and revelation of information abstract we consider an economy with asymmetric information and two types of agents fully informed and uninformed uninformed agents update their information observing equilibrium prices and the equilibrium levels of other agents excess demand we show that for a generic set of economies there are rational expectations equilibria which are partially revealing on an open dense set of signals of positive lebesgue measure provided that the dimension of the signal space is sufficiently larger than the dimension of the commodity space

price discovery in a matching and bargaining market with aggregate uncertainty abstract we introduce aggregate uncertainty into a rubinstein and wolinsky 1985 type dynamic matching and bilateral bargaining model the market can be either in a high state where there are more buyers than sellers or in a low state where there are more sellers than buyers traders do not know the state they randomly meet each other and bargain by making take it or leave it offers the only information transmitted in a meeting is the time a trader spent on the market there are two kinds of search frictions time discounting and exogenous exit we find that as the search frictions vanish the market discovers the competitive price quickly the prices offered in equilibrium converge in expectation to the true state walrasian price at the rate linear in the total search friction this rate is the same as it would be if the state were commonly known

toward a strategic foundation for rational expectations equilibrium a step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with n buyers and m sellers with interdependent values and affiliated private information if there are sufficiently many buyers and sellers and their bids are restricted to a sufficiently fine discrete set of prices then generically there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents in particular the large double auction equilibrium is almost efficient and almost fully aggregates the agents information

corporate financial hedging with proprietary information abstract if a firm has information pertinent to its own dividend stream that is not made available to its shareholders it may be in the interests of the firm and its shareholders to adopt a financial hedging policy this is in contrast with the modigliani miller theorem which implies that with informational symmetry such financial hedging is irrelevant in certain cases hedging policies are identified that are unanimously supported by shareholders

an exploration of the eductive justifications of the rational expectations hypothesis this paper examines justifications of the rational expectations hypothesis that rely on the analysis of the agents mental forecasting educing activity which involves forecasting the forecasts of others etc the corresponding concept of eductive learning stability based on the game theoretical concept of rationalizability is primarily used within the classical muth model conditions for coordination of beliefs are interpreted and discussed they are robust to the introduction of noise more generally eductive stability fits economic intuition on coordination stability increases when the industry product differentiation increases and when decisions are sequential and observable copyright 1992 by american economic association

the generic existence of rational expectations equilibrium in the higher dimensional case abstract the study of the generic existence of rational expectations equilibrium has concentrated on three cases according to whether the space of states of private information has dimension less than equal to or greater than the price space previous results have shown that in the first case fully revealing equilibria exist generically and in the second case there are open sets of environments with no equilibrium this paper shows that in the third case there is a residual set of environments which permits equilibria which are arbitrarily close to fully revealing

rational behavior and rational expectations abstract this paper presents a new definition of rational expectations equilibrium in security markets characterized by a rigorous treatment of the decision problem facing each agent a rational expectations equilibrium is one in which it is common knowledge among the agents that all of them are rational and that the price observed is the market clearing price the paper shows that such equilibria always exist and that they need not have the property that for generic economies the equilibrium price reveals all economically relevant information the paper also shows that the new definition generalizes existing definitions of rational expectations equilibrium

notes on sequence economies transaction costs and uncertainty abstract a sequence economy is an economy with trade at every date and state it is inessential if its equilibria coincide with those of the corresponding arrow debreu economy we examine some of the conditions for essentiality 1 if there are transaction costs then even if all states of nature are spanned by the securities the economy is generically essential 2 in the absence of transaction costs we show by examples that spanning is neither necessary nor suficient for inessentiality the former because some state distinctions may be irrelevant the latter because of possible multiple spot equilibria for a given state 3 we speculate on the possibility that price contingent securities might complete the markets and more generally on the idea of endogenous uncertainty journal of economic literature classification number c62

redistributive effects of transfer programmes in the united kingdom we discuss the redistribution effects of transfer using a conditional choice general equilibrium model we calibrate it to uk data for the early 2000s results indicate that a money metric measure of the welfare value of transfer received by the bottom decile of uk households equals 17 of the cash transfer

partial revelation with rational expectations we exhibit a partially revealing rational expectations equilibrium where no individual knows the state of the world or the quantities traded by any other individual c 1998 academic press

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

expectations equilibria with dispersed information existence with approximate rationality in a model with a continuum of agents and finitely many states of the world a model of a large economy in which prices transmit information about the state of the world which is an argument in consumers utility functions from more informed to less informed agents is analysed the basic hypothesis is that the forecast functions of imperfectly informed agents are suitably dispersed for any such distribution of forecasts market clearing prices exist moreover there is always an equilibrium in which each agent s expectations are approximately rational

information and strategic behavior abstract does encouraging trader participation enhance market competitiveness this paper shows that when trader preferences are interdependent trader market power does not necessarily decrease with greater participation and traders need not become price takers in large markets thus larger markets can be less liquid and associated with lower ex ante welfare in the linear normal model the necessary and sufficient condition on the information structure is provided under which price impact is monotone in market size a condition is given when the rational expectations equilibrium which is typically not fully revealing within the considered class of preference interdependencies is obtained in large markets

the role of private information in dynamic matching and bargaining can it be good for efficiency abstract we consider a private information replica of the dynamic matching and bargaining model of mortensen and wright 2002 we find that private information typically deters entry but the welfare can actually be higher under private information

learning hypothesis testing and rational expectations equilibrium abstract foster and young 2003 provide a model of learning by hypothesis testing that spends almost all of the time approximating nash equilibria of a repeated game here i extend this learning model to a macroeconomic setting where agents decisions are informed by hypotheses they hold regarding the economy they periodically test these hypotheses against observed data and replace them if they fail under certain conditions agents who learn in this way spend a large fraction of the time approximating rational expectations equilibria

incorporating nonmarket time into benefit cost analyses of social programs an application to the self sufficiency project abstract benefit cost analysis is used extensively in the evaluation of social programs often the success or failure of these programs is judged on the basis of whether the calculated net benefits to society are positive or negative almost all existing benefit cost studies of social programs count entire increases in income accruing to participants in a social program as net benefits to society however economic theory implies that the conceptually appropriate measure of the impact of a government program on any group of individuals is the net change in their surplus or economic rent rather than the net change in their income for example if a social program causes increases in income by increasing work hours then the lost nonmarket time that accompanies these increases has value that needs to be counted as a cost when assessing the merits of that program in this paper we develop a methodology for incorporating lost nonmarket time into benefit cost analyses of social programs we apply our methodology to the self sufficiency project ssp an experimental welfare to work program tested on a pilot basis in two provinces in canada during the 1990s we find that if losses in nonmarket time are ignored ssp yields a substantial positive net benefit to society however if losses in nonmarket time are taken into account the net societal benefits are greatly reduced even becoming negative in certain instances we conclude that future benefit cost analyses of social programs must take effects on nonmarket time into account in order to give a more accurate picture of the net benefits of the program

convergence to perfect competition of a dynamic matching and bargaining market with two sided incomplete information and exogenous exit rate abstract consider a decentralized dynamic market with an infinite horizon and incomplete information in which buyers and sellers values for the traded good are private and independently drawn time is discrete each period has length and each unit of time a large number of new buyers and sellers enter the market within a period each buyer is matched with a seller and each seller is matched with zero one or more buyers every seller runs a first price auction with a reservation price and if trade occurs the seller and winning buyer exit with their realized utility traders who fail to trade either continue in the market to be rematched or exit at an exogenous rate we show that in all steady state perfect bayesian equilibria as approaches zero equilibrium prices converge to the walrasian price and realized allocations converge to the competitive allocation

on the existence of rational expectations equilibrium abstract we prove a theorem on the existence of rational expectations general economic equilibrium when agents condition on prices as well as on private information and maximize the expectation of a state dependent utility function the key to the result is a new idealization of what it means for a set of empirical distributions to support agents expectations this idealization depends on the notion that agents compare their expectations with continuous versions of the random empirical distributions that are generated by the workings of the economy the existence theorem covers all strictly concave utility functions arbitrary distributions of the state variable and situations in which the dimension of the state variable is large relative to the number of commodities

common knowledge of rationality and market clearing in economies with asymmetric information abstract consider an exchange economy with asymmetric information what is the set of outcomes that are consistent with common knowledge of rationality and market clearing to address this question we define an epistemic model for the economy that provides a complete description not only of the beliefs of each agent on the relationship between states of nature and prices but also of the whole system of interactive beliefs the main result theorem 1 provides a characterization of outcomes that are consistent with common knowledge of rationality and market clearing henceforth ckrmc outcomes in terms of a solution notion ex post rationalizability that is defined directly in terms of the parameters that define the economy ckrmc manifests several intuitive properties that stand in contrast to the full revelation property of rational expectations equilibrium in particular for a robust class of economies 1 there is a continuum of prices that are consistent with ckrmc in every state of nature and hence these prices do not reveal the true state 2 the range of ckrmc outcomes is monotonically decreasing as agents become more informed about the economic fundamentals and 3 trade is consistent with common knowledge of rationality and market clearing even when there is common knowledge that there are no mutual gains from trade

the existence of fully rational expectations approximate equilibria with noisy price observations abstract nonrevealing fully rational expectations approximate equilibria exist in microeconomic pure exchange economies in which uninformed agents have suitably dispersed noisy price observations such traders maximize a state dependent expected utility conditional on the price vector they observe the distributions of noisy price observations and the correct equilibrium relationship between states of the world and prices in equilibrium aggregate excess demand is small with high probability in every state of the world and its expectation is also small this magnitude diminishes as the noisy price observations become more accurate equilibria are obtained by applying a fixed point argument to state dependent excess demand functions which are smooth because of the noisy price observations

learning and price discovery in a search market we introduce learning into an otherwise standard two sided search and bargaining market there is uncertainty about the price distribution due to uncertainty about an underlying exogenous state of relative demand in the high state buyers are on the long side otherwise they are on the short side in equilibrium prices are on average higher in the high state individual agents learn about the distribution while searching agents typically start out by experimenting with a tough bargaining position buyers may initially insist on a low price and sellers on a high price after successive failures to trade agents become increasingly pessimistic about the market conditions and soften their bargaining stance when frictions are small equilibrium transaction prices are approximately market clearing despite aggregate demand being unknown thus the search and bargaining procedure enables price discovery in a decentralized market

equilibrium in economies with financial markets uniqueness of expectations and indeterminacy abstract we consider two period pure exchange economies with uncertainty and complete or incomplete asset markets assets are nominal if the number of agents and of period zero commodities is large enough there is a dense residual set of economies parametrized by utility functions such that for each pair of distinct financial equilibria spot zero equilibrium prices are different agents observing first period equilibrium prices can formulate exact forecasts on future equilibrium prices notwithstanding the real indeterminacy of the set of financial equilibria if the asset market is complete the result is true for an open and dense set of economies journal of economic literatureclassification numbers d52 d80

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

dynamic markets with competitive bidding the model features a dynamic market in steady state in which prices are determined in first price auctions it combines competition over time familiar from the pairwise meeting models with instantaneous bidding competition it inquires how different properties of the model determine the relative importance of these two aspects of the competition and in particular how the non market clearing price result of the matching and bargaining models is affected by the

insider trading in a rational expectations economy it is often argued that efficiency considerations require society to freely permit insider trading in this article an opposing efficiency argument is formalized the model incorporates an investment stage followed by a trading stage if outsiders expect insiders to take advantage of them in trading outsiders will reduce their investment the insiders loss from this diminished investor confidence may more than offset their trading gains consequently a prohibition on insider trading may effect a pareto improvement insiders are made better off if they can precommit not to trade on their privileged information govemment regulation accomplishes exactly this jel 022 026 313 the traditional rationale articulated for insider trading regulation and other securities law is that such rules promote confidence in markets indeed president franklin d roosevelt justified the first major u s securities legislation by saying it should give impetus to honest dealing in securities and thereby bring back public confidence similar language is still invoked half a century later in connection with enforcement efforts against insider trading and in proposals for tightened stock

information acquisition in financial markets tions agents have exponential utility and random variables are normally distributed these assumptions are often necessary to obtain closed form solutions we present an example with alternative assumptions and demonstrate that some of the conclusions from previous literature fail to hold in particular we show that in our example as more agents acquire information prices do not necessarily become more informative and agents may have greater incentive to acquire informatioln learning can therefore be a strategic complement allowing for the possibility of multiple equilibria

bilateral matching and bargaining with private information we study equilibria of a dynamic matching and bargaining game dmbg with two sided private information bilateral bargaining the model is a private information replica of mortensen and wright 2002 there are two kinds of frictions time

on endogenous formation of price expectations abstract we study a two period exchange economy with complete financial markets and endogenous borrowing constraints contrary to perfect foresight paradigm we assume that agents are heterogeneous in their ability to forecast future prices we introduce a new equilibrium concept called informationally constrained equilibrium where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency we prove that under standard assumptions an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits

a decentralized market with common values uncertainty non steady states we analyse a market where i trade proceeds by random and anonymous pairwise meetings with bargaining ii agents are asymmetrically informed about the value of the traded good and iii no new entrants are allowed once the market is open we show that information revelation and efficiency never obtain in equilibrium even as discounting is removed this holds whether the asymmetry is two sided or one sided in some cases there exist equilibria where a substantial amount goes untraded this contrasts with the earlier literature which was based on the steadystate equilibria of a model where agents enter the market every period

rational expectations equilibrium with econometric models we prove the existence of general economic equilibrium under uncertainty when agents form econometric models of the relationship among their private information prices and the state of the environment the functional form of each agent s model is specified in advance with a finite number of parameters to be determined agents are then thought of as performing linear least squares estimation of the parameters equilibrium requires not only that markets clear but also that each agent be using the vector of parameter values which within a compact convex set of parameters gives the least squares best fit to the data that is generated by the working of the economy when agents adhere to their models

beauty contests and iterated expectations in asset markets in a financial market where traders are risk averse and short lived and prices are noisy asset prices today depend on the average expectation today of tomorrow s price thus iterating this relationship the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price this will not in general equal the date 1 average expectation of the date 3 price we show how this failure of the law of iterated expectations for average belief can help understand the role of higher order beliefs in a fully rational asset pricing model and explain over reaction to noisy public information

information revelation in a market with pairwise meetings the paper presents a simple pairwise meetings model of trade the new feature is that agents have asymmetric information about the true state of the world the focus is on the transmission of the information through the process of trade the qualitative question is to what extent is the information revealed to uninformed agents through the trading process when the market is in some sense frictionless in particular does the decentralized process give rise to full revelation results as derived by the literature on rational expectations for centralized and competitive environments in the context of the model of this paper it turns out that the information is not fully revealed to uninformed agents even when the market is in some sense approximately frictionless

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

information quality and options microstructure researchers have long understood that information quality has an effect on price formation in the underlying asset market however option researchers have largely ignored the fact that information quality might also impact the options market this article characterizes the nature of the impact by showing how option prices and implied volatility levels are related to the forward looking information quality path this result follows from a noisy rational expectations model that abandons the normal distribution in favor of the gamma distribution but maintains the standard assumption of exponential utility thus the new model bridges the gap between the microstructure literature that relies so heavily on the normal exponential framework and the options literature that relies exclusively on models that are consistent with the limited liability of stock prices the model s tractability allows for a robustness check against the standard framework and provides a viable setting for analyzing the empirical implications of information quality for the options market jel d8 gl

a cost benefit analysis of the random assignment uk employment retention and advancement demonstration this article presents a cost benefit analysis of britain s employment retention and advancement era demonstration which was evaluated through the first large scale randomized control trial in the uk era used a combination of job coaching and financial incentives in attempting to help long term unemployed men and low income lone parents sustain employment and progress in work once they were employed using both administrative and survey data era s effects on benefits and costs were estimated through impact analyses which exploited the experimental design the findings indicated that era was cost beneficial for long term unemployed adult men but not for lone parents the key findings appear robust to sensitivity tests uncertainty as implied by the ses of the estimated impacts was addressed through a monte carlo analysis an approach seldom previously used in cost benefit analyses of social programs

information percolation in large markets we introduce a simple model of the percolation of information of common interest through a large market as agents encounter each other over time and reveal information to each other some of which they may have received earlier from other agents we are particularly interested in the evolution over time of the cross sectional distribution in the population of the posterior probability assignments of the various agents we provide a market example based on privately held auctions and obtain a relatively explicit solution for the cross sectional distribution of posterior beliefs at each time our results contribute to the literature on information transmission in markets hayek 1945 argues that markets allow information that is dispersed in a population to be revealed through prices grossman s 1981 notion of a rational expectations equilibrium formalizes this idea in a setting with price taking agents milgrom 1981 pesendorfer and swinkels 1997 and reny and perry 2006 provide strategic foundations for the rational expectations equilibrium concept in centralized markets a number of important markets however are decentralized these include over the counter markets and private auction markets wolinsky 1990 and blouin and serrano 2002 study information transmission in decentralized markets in contrast to these two papers equilibrium behavior in our market example leads to full revelation of information we happily acknowledge conversations with manuel amador frank kelly jeremy stein and pierre olivier weill and research assistance from sergey lobanov rubinstein and wolinsky 1985 and gale 1986a 1986b study decentralized markets without asymmetric information satterthwaite and shneyerov 2003 study decentralized market with private value asymmetric information amador and weill 2006 study a more abstract setting regarding transmission of common and private i nformation

sunspots correlation and competition correlated equilibria in strategic market games played simultaneously by overlapping generations of players correspond to sunspot equilibria in the associated competitive economy we provide a necessary and sufficient condition for existence of effective correlation an increase in the number of agents in a given economy may allow for effective correlation

market efficiency and natural selection in a commodity futures market while the literature usually justifies informational efficiency in the context of rationality this article shows informational efficiency by applying the evolutionary idea of natural selection in a dynamic futures market speculators are assumed to merely act upon their predetermined trading types buyer or seller their predetermined fractions of wealth allocated for speculation and their inherent abilities to predict the spot price reflected in their distributions of prediction errors with respect to the spot price this article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

sentiments and economic activity evidence from u s states we examine whether sentiment influences aggregate demand by studying the relationship between the michigan survey expectations concerning national output growth and future economic activity at the state level we instrument for local sentiments with political outcomes positing that agents in states with a higher share of congressmen from the political party of the sitting president will be more optimistic this instrument is strong in the first stage and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests

information percolation with equilibrium search dynamics we solve for the equilibrium dynamics of information sharing in a large population each agent is endowed with signals regarding the likely outcome of a random variable of common concern individuals choose the effort with which they search for others from whom they can gather additional information when two agents meet they share their information the information gathered is further shared at subsequent meetings and so on equilibria exist in which agents search maximally until they acquire sufficient information precision and then search minimally a tax whose proceeds are used to subsidize the costs of search improves information sharing and can in some cases increase welfare on the other hand endowing agents with public signals reduces information sharing and can in some cases decrease welfare

correlated equilibria and sunspots we examine when sunspots uncertainty that has no influence on endowments preferences or technology can affect equilibrium in a simple two period two commodity two class economy we find that such an effect is possibly only if the signals random variables that different agents observe are imperfectly correlated neither perfectly correlated nor independent and at least one commodity is a giffen good for two special cases we characterize the set of equilibria due to sunspots we conclude by showing the intimate connection between the sunspot equilibria of our finite horizon model and those of the overlapping generations literature

the revelation of information and self fulfilling beliefs abstract at a rational expectations equilibrium ree individuals are assumed to know the map from states to prices this hypothesis has two components that agents agree consensus and that they have point expectations degeneracy we consider economies where agents beliefs are described by a joint distribution on states and prices and these beliefs are fulfilled at equilibrium beliefs are self fulfilling if every price in the support of the distribution is an equilibrium price the corresponding equilibria are beliefs equilibria be the further restriction that agents have the same beliefs results in common beliefs equilibria cbe we study the relationship between be cbe and ree thus isolating the role of consensus and of degeneracy in achieving rational expectations journal of economic literatureclassification numbers d51 d82

partially revealing rational expectations equilibrium in a competitive economy abstract a class of pure exchange economies is considered in which some agents are informed of private information and others are uninformed existence of a partially revealing rational expectations equilibrium ree is proved without restricting attention to particular functional forms for utility functions and probability distributions without introducing noise into the model and without departing from the standard definition of ree the equilibrium is robust in the sense that if the primitives of the economy are slightly perturbed the economy continues to have a qualitatively similar ree with somewhat stronger assumptions placed on the economy the equilibrium is also the unique measurable ree

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

asymmetric information in bilateral trade and in markets an inversion result abstract i consider bilateral trade between a seller and a buyer with private valuations the seller makes a take it or leave it price offer if the seller observes the buyer s valuation symmetric information bilateral trade is trivially efficient if the seller cannot observe the valuation asymmetric information bilateral trade is inefficient this bilateral trading game is embedded into a large matching market in the steady state equilibrium of the market game the relation between the informational regime and efficiency is inverted with small frictions efficiency obtains if information is asymmetric if information is symmetric however the trading outcome can be very inefficient even if frictions vanish