efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

tax management loss harvesting and hifo accounting virtually all companies and individuals are faced with the management of taxable assets to manage these assets efficiently investors need to be aware of the impact of taxes on investment returns in the study we report in this article we quantified the benefits of loss harvesting and highest in first out hifo accounting by using monte carlo simulations and investigated the robustness of these strategies in various markets and with various cash flows and tax rates we concluded that a market with high stock specific risk low average return and high dividend yield provides more opportunities to harvest losses in addition a steady stream of contributions refreshes a portfolio and allows the benefits of loss harvesting to remain strong over time conversely withdrawals reduce the advantages of realizing losses our findings show that no matter what market environment occurs in the future managing a portfolio in a tax efficient manner gives substantially better after tax performance than a simple i

information advantage in cournot oligopoly abstract consider an oligopolistic industry where firms have access to the same technology but are asymmetrically informed about the environment even though it is commonplace to think that in this context superior information leads to higher profits we find that under cournot competition this is not generally the case it holds when firms technology exhibits constant returns to scale but it does not necessarily hold otherwise journal of economic literature classification numbers c72 d43 l13

ex ante incentive efficient trading mechanisms without the private valuation restriction abstract the private valuation assumption found in most trading mechanism design papers rules out markets whose valuation structure generates externalities between traders this paper characterizes the set of ex ante incentive efficient trading mechanisms for a large class of markets that do admit such externalities and for bilateral trade markets establishes the impossibility of a first best solution across a class of trading problems employing uniform priors and linear valuation structures this paper also compares levels of market efficiency for varying numbers of traders

core equilibria and incentives in large asymmetric information economies we consider a perfectly competitive ex ante economy with a continuum of agents and negligible asymmetric information for such an economy we recast the basic classical results on the existence of walrasian equilibrium core equivalence and the blocking size of coalitions moreover we examine the incentive compatibility of the ex ante pareto core and walrasian allocations

simple strategy proof approximately walrasian mechanisms abstract this note provides an indirect analysis of the incentive properties of the walrasian mechanism it presents mechanisms under which truth telling is a dominant strategy in finite exchange economies in contrast to the walrasian mechanism and whose outcomes generically approximate walrasian ones for large economies these mechanisms provide new insights on the well know trade off between efficiency and incentive compatibility in finite economies journal of economic literature classification numbers d50 d71 d78

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

having your cake and eating it too the before and after tax efficiencies of an extended equity mandate this article shows that extended mandates are especially effective for investors subject to taxes not only is the portfolio more efficiently positioned from a before tax perspective but it also offers significant after tax benefits from both increased loss harvesting and tax arbitrage between tax rates on long and short positions

strategy proof exchange we consider the allocation of goods in exchange economies with a finite number of agents who may have private information about their preferences in such a setting standard allocation rules such as walrasian equilibria or rational expectations equilibria are not compatible with individual incentives we characterize the set of allocation rules which are incentive compatible or in other words the set of strategy proof social choice functions social choice functions which are strategy proof are those which can be obtained from trading according to a finite number of pre specified proportions the number of proportions which can be accommodated is proportional to the number of agents such rules are necessarily inefficient even in the limit as the economy grows

strategic liquidity supply and security design we study how securities and issuance mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity in our model asset owners seek to obtain liquidity by selling claims contingent on privately observed future cash flows liquidity suppliers can be competitive or strategic in the optimal trading mechanism associated to an arbitrary given security issuers with low cash flows sell their entire holdings of the security while issuers with high cash flows are typically excluded from trade by designing the security optimally issuers can avoid exclusion altogether we show that the optimal security is debt because of its low informational sensitivity debt mitigates the adverse selection problem furthermore by pooling all issuers with high cash flows debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with lower cash flows

on income taxation and the core abstract the core of an optimal income tax economy is examined in such economies optima are usually second best because the identities of the agents are not known to the government although it is generally unclear how to handle information problems in cooperative games such as the one examined here two core concepts are explored for the first concept incentive compatibility is imposed only within potential blocking coalitions and the core consists only of head taxes or is empty if there are no increasing returns to coalition size for the second concept incentive compatibility is also imposed for potential entrants into blocking coalitions and the core is shown to be empty for a simple reasonable and interesting class of models

threshold strategy proofness on manipulability in large voting problems in voting problems where agents have lipschitz continuous utility functions on a multidimensional space of alternatives a voting rule is threshold strategy proof if any agent can obtain only a limited utility gain by not voting for a most preferred alternative if the number of agents is large enough for anonymous voting rules it is shown that this condition is not only implied by but is in fact equivalent to the influence of any single agent decreasing to zero as the number of agents grows if there are at least five agents the mean rule taking the average vote is shown to be the unique anonymous and unanimous voting rule that meets a lower bound with respect to the number of agents needed to obtain threshold strategy proofness

approximately competitive equilibria in large finite economies abstract we consider exchange economies where each consumer may report or act according to any demand function provided that there exist situations that the consumer finds plausible in which the reported demand performs at least as well as the true demand we identify conditions under which as the size of the economy increases all the market clearing prices and allocations of the reported economy approximate the competitive equilibria of the true economy journal of economic literature classification numbers d51 d82

implementation in differential information economies abstract we consider the problem of implementation of social choice correspondences in differential information economies we provide necessary conditions for implementation and slightly stronger conditions which are sufficient to guarantee implementation

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

informational smallness and the scope for limiting information rents abstract for an incomplete information model of public good provision with interim participation constraints we show that efficient outcomes can be approximated with approximately full surplus extraction when there are many agents and each agent is informationally small the result holds even if agents payoffs cannot be unambiguously inferred from their beliefs the contrary result of neeman z neeman the relevance of private information in mechanism design j econ theory 117 2004 55 77 rests on an implicit uniformity requirement that is incompatible with the notion that agents are informationally small because there are many other agents who have information about them

a note on the individualistic foundations of the core in economies with asymmetric information abstract two foundations of the core are considered in the context of exchange economies the standard coalition based interpretation and one based on the individual profit seeking behaviour of agents the resulting core notions coincide in symmetric information economies but diverge when generalized to economies with asymmetric information

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

on the failure of core convergence in economies with asymmetric information in interim economies with asymmetric information we show that the coarse core of wilson 1978 does not converge to price equilibrium allocations as the economy is replicated this failure of core convergence is a basic consequence of asymmetric information and extends to any reasonable notion of either interim core or price equilibrium

optimal domestic regulation under asymmetric information and international trade a simple general equilibrium approach we investigate the design of domestic incentive regulations in a small economy opened to trade and its implications for international specialization and for trade openness to remain welfare improving more specifically we append to an otherwise standard 2 2 heckscher ohlin model of a small open economy a continuum of intermediate sectors producing nontradable goods used in tradable sectors those goods are produced by privately informed regulated firms asymmetric information induces distortions with general equilibrium impacts the small economy becomes relatively richer in the informationally sensitive factor so that asymmetric information might reverse trade patterns free trade is pareto dominated by autarky when it exacerbates agency distortions

a note on pareto optimality in differential information economies a mechanism is posterior efficient if the agents expected utilities given the outcomes of this mechanism can never be pareto improved a non revealing resp completely revealing mechanism is posterior efficient if and only if it is incentive interim resp ex post efficient

do after tax returns affect mutual fund inflows abstract this paper explores the relationship between the after tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds previous studies have documented that funds with high pretax returns attract greater inflows this paper presents evidence based on a large sample of retail equity mutual funds over the period 1993 1999 that after tax returns have more explanatory power than pretax returns in explaining inflows in addition funds with large overhangs of unrealized capital gains experience smaller inflows all else equal than funds without such unrealized gains a large capital gain overhang discourages both gross fund inflows and gross outflows but the inflow effect dominates the outflow effect

portfolio tax trading with carryover losses we study portfolio choice with multiple stocks and capital gains taxation assuming that capital losses can only offset current or future realized capital gains we show through backtesting using empirical distributions that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature using value and growth or small and large portfolios the backtests show that allocations remain persistently underdiversified carryover losses have large economic significance since they can dramatically shrink the no trade region finally the backtested economic cost of incorrectly modeling capital losses is at least 8 of lifetime wealth the internet appendix is available at https doi org 10 1287 mnsc 2017 2733 this paper was accepted by neng wang finance

the ex ante incentive compatible core in the absence of wealth effects in a differential information economy with quasi linear utilities monetary transfers facilitate the fulfillment of incentive compatibility constraints the associated ex ante core is generically non empty however we exhibit a wellbehaved exchange economy in which this core is empty even if goods are allocated through random mechanisms

non cooperative bargaining and the incomplete informational core abstract in an exchange economy with incomplete information the signaling core is defined by the set of state contingent allocations to which no coalitions object under informational leakage through proposals by informed agents an objection underlying the signaling core is supported by a sequential equilibrium of an ultimatum bargaining game with an informed proposer we prove that a stationary sequential equilibrium allocation in a rubinstein type sequential bargaining game with a restart rule belongs to the signaling core if the belief of players satisfies a self selection property

all stage strong correlated equilibrium abstract a strong correlated equilibrium is a strategy profile that is immune to joint deviations different notions of strong correlated equilibria were defined in the literature one major difference among those definitions is the stage in which coalitions can plan a joint deviation before ex ante or after ex post the deviating players receive their part of the correlated profile in this paper we show that an ex ante strong correlated equilibrium is immune to deviations at all stages thus the set of ex ante strong correlated equilibria of moreno wooders games econ behav 17 1996 80 113 is included in all other sets of strong correlated equilibria

market power and information revelation in dynamic trading we study a strategic model of dynamic trading where agents are asymmetrically informed over common value sources of uncertainty there is a continuum of buyers and a finite number n of sellers all buyers are uninformed while at least one seller is privately informed about the true state of the world when n 1 full information revelation never occurs in equilibrium and the only information transmission happens in the first period with n 1 the outcome depends both on the structure of the sellers information and even more importantly on the intensity of competition allowed by the existing trading rules when there is intense competition absence of clienteles information is fully and immediately revealed to the buyers in every equilibrium for n large enough regardless of the number of informed sellers on the other hand for trading arrangements characterized by less intense forms of competition presence of clienteles for any n we always have equilibria where information is never fully revealed moreover in that case when only one seller is informed for many parameter configurations there are no equilibria with full information revelation even for large n jel c72 c78 d82 d83

the efficiency of competitive mechanisms under private information we consider the efficiency properties of exchange economies where privately informed traders behave strategically specifically a competitive mechanism is any mapping of traders reports about their types to an equilibrium price vector and allocation of the reported economy in our model some traders may have non vanishing impact on prices and allocations regardless of the size of the economy although truthful reporting by all traders cannot be achieved we show that given any desired level of approximation there is n such that any bayesian nash equilibrium of any competitive mechanism of any private information economy with n or more traders leads with high probability to prices and allocations that are close to a competitive equilibrium of the true economy in particular allocations are approximately efficient a key assumption is that there is small probability that traders behave non strategically

discontinuity of output convergence within the united states why has the course changed has the progress of output convergence changed within the united states this article examines the output convergence among u s states for the last five decades by making several improvements over the extant literature by applying a battery of convergence tests designed to capture nonlinear transitional dynamics to real output per worker data i e nominal values deflated by state level price we find that output convergence has not been a feature of the continental united states since the 1970s instead output convergence has proceeded among four subgroups within which constituent states have certain characteristics in common our regression analysis suggests that state level characteristics related to technology and human capital play a crucial role in accounting for the formation and composition of convergence clubs in agreement with the recent theoretical models of growth and development e g aghion et al 2009 gennaioli et al 2013b the level of technology proxied by patents turns out to be a consistently significant determinant even after controlling for endogeneity suggesting that frictions in the diffusion of technology and human capital may have led to clustering of states with different levels of productivity our results therefore cast doubt on the common view that diffusion of knowledge and technology across state borders is frictionless jel o47 o51

trade with heterogeneous prior beliefs and asymmetric information no trade theorems have shown that new information will not lead to trade when agents share the same prior beliefs this paper explores the structure of no trade theorems with heterogeneous prior beliefs it is shown how different notions of efficiency under asymmetric information ex ante interim ex post are related to agents prior beliefs as well as incentive compatible and public versions of those efficiency concepts these efficiency results are used to characterize necessary and sufficient conditions on agents beliefs for no trade theorems in different trading environments

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

monotonicity and rationalizability in a large first price auction this paper proves that the monotonicity of bidding strategies together with the rationality of bidders implies that the winning bid in a first price auction converges to the competitive equilibrium price as the number of bidders increases wilson 1977 instead of analysing the symmetric nash equilibrium we examine rationalizable strategies bernheim 1984 pearce 1984 among the set of monotonic bidding strategies to prove that any monotonic rationalizable bidding strategy must be within a small neighbourhood of the truthful valuation of the object conditioned on the signal received by the bidder we obtain an information aggregation result similar to that of wilson 1977 while dispensing with almost all symmetric assumptions and using a milder solution concept than the nash equilibrium in particular if every bidder is ex ante identical then any rationalizable bidding strategy must be within a small neighbourhood of the symmetric nash equilibrium in a symmetric first price auction the symmetry of outcomes is implied rather than assumed copyright 2005 wiley blackwell

search adverse selection and market clearing we examine a dynamic decentralized trading model with infinitesimal sellers and buyers to investigate whether or not the market fails to clear in the limit of search friction vanishing a seller who has private information about product quality and a buyer are matched to bargain over price they form a long term relationship if they reach agreement they return to the matching pool if they fail to agree or the existing relationship is dissolved the market fails to clear if and only if the ratio of agents patience over the dissolution rate exceeds a threshold

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

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

interim third party selection in bargaining abstract third party intervention can reduce the risk of conflict in situations where the bargaining failure is due to asymmetric information in this paper i consider the selection of a third party in a two person bargaining problem where each disputant has private information about its relative strength or weakness for a class of problems i find that the disputants choose the third party that is best for the strong type but worst for the weak type due to the incentive of each disputant to avoid seeming weak to their adversary the selected third party s intervention entails a higher ex ante chance of conflict than intervention by any other alternative this paper shows how the process of interim third party selection can have important consequences for the outcome of a third party intervention in bargaining

implementation in economies with a continuum of agents we study a general implementation problem for exchange economies with a continuum of players and private information and test the robustness of the results for sequences of approximating finite economies assuming that the designer knows the distribution of the characteristics in the economy we consider continuous and unique implementation in both its equilibrium and dominant strategies versions and obtain results for general self selective first and second best allocations an upper hemicontinuity property of bayesian equilibria of approximating economies for continuous mechanisms is demonstrated using this we can for example conclude that if a given continuous mechanism implements uniquely a walrasian allocation in the continuum economy then all bayesian equilibria of large approximation economies will with probability close to one yield an allocation which is almost ex post pareto optimal

private information in large economies this paper examines the effect of private information in large economies we show that in a model with stochastic information structures the restrictions imposed on allocations by the presence of private information disappear in large economies we also show that for a large class of direct mechanisms the incentive for any agent to falsely report private information goes to zero as the number of agents becomes large these results provide an informational smallness analog to existing quantity smallness limiting results in the literature

optimal robust bilateral trade risk neutrality a risk neutral seller and buyer with private information bargain over an indivisible item we prove that optimal robust bilateral trade mechanisms are payoff equivalent to non wasteful randomized posted prices

asymptotic efficiency in large exchange economies with asymmetric information the authors provide conditions on an exchange economy with asymmetric information that guarantee that when the economy is replicated sufficiently often there will be an allocation that is incentive compatible individually rational and nearly efficient the main theorem covers both the case in which aggregate uncertainty remains when the economy is replicated and the case in which replication eliminates aggregate uncertainty in addition the authors demonstrate how their theorem does or does not apply to standard asymmetric information problems such as the buyer s bid double auction problem akerlof s lemons problem and insurance with asymmetric information copyright 1992 by the econometric society

economic transition and growth some extensions of neoclassical growth models are discussed that allow for cross section heterogeneity among economies and evolution in rates of technological progress over time the models oer a spectrum of transitional behavior among economies that includes con vergence to a common steady state path as well as various forms of transitional divergence and convergence mechanisms for modeling such transitions and measuring them econo metrically are developed in the paper a new regression test of convergence is proposed its asymptotic properties are derived and some simulations of its nite sample properties are reported transition curves for individual economies and subgroups of economies are estimated in a series of empirical applications of the methods to regional us data oecd data and penn world table data

divided the two americas examining club convergence in the u s this paper finds club convergence within the 50 u s states using the phillips and sul regression based convergence test with per capita real state domestic product from 1997 to 2017 two clubs wit

imperfect competition and efficiency in lemons markets this article studies the impact of competition on the degree of inefficiency in lemons markets more precisely we characterise the second best mechanism i e the optimal mechanism with private information in a stylised lemons market with finite numbers of buyers and sellers we then study the relationship between the degree of efficiency of the second best mechanism and market competitiveness a general message of our results is that increasing competition may not help lemons markets in some circumstances moreover increasing competition beyond a certain degree increases the distance between the first best and second best levels of efficiency

efficiency enhancing signalling in the samaritan s dilemma suppose an altruistic person a is willing to transfer resources to a second person b if b comes upon hard times if b anticipates that a will act in this manner b will save too little from both agents point of view this is the samaritan s dilemma this paper shows that the undersaving result is mitigated if we relax the standard assumption of complete information because if a is uncertain about how big b s need for support is b will have an incentive to signal that he is in great need by saving more than he otherwise would have done

incomplete information incentive compatibility and the core abstract we consider an exchange economy in which agents possess private information at the time of engaging in state contingent contracts while communication of private information is permitted the true information state is not verifiable the enforcement of contracts is therefore limited by incentive compatibility constraints we formalize a notion of the core for such an economy our analysis can be viewed as an attempt to incorporate incentive compatibility in the coarse core of r wilson 1978 econometrica46 807 816 or as an attempt to introduce coalitional contracts in the notion of incentive efficiency of b holmstrom and r myerson 1983 econometrica51 1799 1819 while there are some special cases in which the incentive compatible core is non empty our main result shows that is not generally true journal of economic literatureclassification numbers c71 c72 d51

informational size and the incentive compatible coarse core in quasilinear economies abstract in this paper we show that in quasilinear economies the incentive compatible coarse core is non empty if agents are informationally small in the sense of mclean and postlewaite 2002 and the strict core in each state is non empty

tax managed factor strategies we examine the tax efficiency of an indexing strategy and six factor tilts between june 1995 and march 2018 average value added by tax management exceeded 1 50 per year at a 10 year horizon for

ex ante efficient ex post individually rational trade abstract consider a bilateral trade model with two sided incomplete information for a general set of independent beliefs an ex post individually rational mechanism generating the same level of ex ante expected gains from trade as an ex ante efficient interim individually rational mechanism is constructed thus imposing the stronger notion of ex post individual rationality on this mechanism design problem generates no loss of efficiency

a note on the incentive compatible core abstract we identify particular exchange economies with asymmetric information in which the ex ante incentive compatible core is nonempty provided that coalitions can allocate goods by means of random mechanisms both the use of random mechanisms and the restriction to a specific class of economies are crucial for the result indeed the ex ante incentive compatible core can be empty i in our class of economies if coalitions can only use deterministic mechanisms and ii outside this class even if random mechanisms are allowed journal of economic literature classification numbers c71 d82 d51

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

perfect competition in asymmetric information economies compatibility of efficiency and incentives the idea of perfect competition for an economy with asymmetric information is formalized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents and the individual agents relevant signals are essentially pairwise independent conditioned on the true states of nature thus there is no incentive for an individual agent to manipulate her private information the existence of incentive compatible ex post walrasian allocations is shown for such a perfectly competitive asymmetric information economy with or without common values consequently the conflict between incentive compatibility and pareto eciency is resolved exactly and its asymptotic version is derived for a sequence of large but finite private information economies

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

the equivalence of lending equilibria and signalling based insurance under asymmetric information i present a model in which a continuum of individuals have stochastic idiosyncratic income shocks complete insurance is physically feasible but unattainable due to an information asymmetry income shocks are observable only by the individuals receiving them any insurance institution must therefore rely on self reporting of income innovations two ways of achieving incentive compatible self reporting are presented the first is a debt market with an explicit lending restriction the second is an insurance contract that linearly filters a signal transmitted by individuals the two are then demonstrated to be identical equilibrium consumption fluctuates in a random walk which is inefficient given the physical potential for complete insurance but is efficient given the information constraints the results are complementary to those of green 1987 but permit more general stochastic processes of income to be analyzed serial correlation of income reduces the efficiency of the insurance

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

equilibria and incentives in private information economies abstract this paper considers three solution concepts in a large private information economy namely walrasian expectations equilibrium private core and insurance equilibrium it shows that these three concepts coincide with each other when the agents are informationally negligible in such an economy in contrast to the finite agent setting one can construct a large private information economy in which incentive compatibility fails completely in the sense that almost every agent in any walrasian expectations equilibrium private core insurance equilibrium allocation has the incentive to misreport her type

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

the tax benefits of separating alpha from beta long only active investment strategies have an inherent flaw investors pay capital gains taxes on market related gains as well as on the alpha created by separating alpha and beta taxes can be r

reputational comparative advantage and multinational enterprise 1 introduction when cultivating a new export market or attempting to expand its share of an existing market an exporter is likely to find that it has been preceded by its reputation minus a readily identifiable brand name quality reputation may solely reflect the country of origin for example when consumers are presented with a large amount of complex product information they may use the country of origin as a heuristic in forming product impressions without considering other product attributes 1 in this article i show that this heuristic decision making process can affect a firm s quality decision and can therefore become self fulfilling hence any bias that consumers have may be well founded however it is only correct because firms respond rationally to it colombia s garment industry provides an interesting example of a self fulfilling unfavorable quality reputation in international trade as described by morawetz 1981 a single colombian garment firm took a contract for 50 000 men s suits that was beyond its capability the poor quality result so tarnished the american importer s name that other high quality importers become wary of colombian sewn garments with the payoff to high quality production reduced colombian garment firms then concentrated on low quality markets and the newly found unfavorable reputation was justified in the model constructed here consumers see only a noisy signal of the product s quality at the time of purchase therefore their posterior beliefs are based on this noisy signal and the country of origin reputations as will be made clear higher quality firms benefit more from an increase in their country s reputation so that a better reputation generates an increase in the percentage of high quality firms in this way the reputation becomes self fulfilling and ex ante identical countries can be correctly perceived as differing in their percentage of high quality producers i next introduce an economy with two sectors one sector produces more complex goods where high quality is not easily verified and is more essential to the product s performance these may be technology intensive products or they may consist of the design and marketing of the goods produced in the other sector in particular high quality production costs and the consumer s value for high quality goods is greater in this sector i show that this sector becomes more profitable as the country of origin reputation increases hence if one country s equilibrium reputation is low and the other country s equilibrium reputation is high then the pattern of specialization and international trade can be determined solely by reputational comparative advantage 2 finally i show that reputational comparative advantage can overshadow a small technological comparative disadvantage in determining the pattern of international trade given this pattern of trade and specialization based on reputational comparative advantage a high reputation firm may expend resources to establish a multinational enterprise mne in the low reputation country for example many mne products require the differing specializations of both the high and low reputation countries although differing in motivation this result accords well with more traditional models of vertical mne 3 however this impetus for mne as well as its more traditional counterparts does not explain why the mne would choose foreign direct investment fdi over a less costly licensing arrangement 4 the quality uncertainty in this model along with the difference in equilibrium reputations allows us to address this question in particular appropriable reputational rents are generated by fdi when the high reputation parent firm procures and internalizes production with a low reputation host firm this fdi breaks the low reputation equilibrium of the host firm and generates reputational rents

strategy proof stochastic assignment abstract i study strategy proof assignment mechanisms where the agents reveal their preference rankings over the available objects a stochastic mechanism returns lotteries over deterministic assignments and mechanisms are compared according to first order stochastic dominance i show that non wasteful strategy proof mechanisms are not dominated by strategy proof mechanisms however non wastefulness is highly restrictive when the mechanism involves randomization in fact the random priority mechanism i e the random serial dictatorship and a recently adopted school choice mechanism deferred acceptance with random tie breaking are wasteful i find that both these mechanisms are dominated by strategy proof mechanisms in general strategy proof improvement cannot be due to merely reshuffling objects and therefore must involve assigning more objects

informational size and incentive compatibility with aggregate uncertainty in mclean and postlewaite econometrica 56 1992 p 2421 we analyzed pure exchange economies with asymmetrically informed agents we defined a notion of informational size and showed that when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature the conflict between incentive compatibility and ex post efficiency can be made small if agents have sufficiently small informational size this paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present i e when significant uncertainty about the world persists even when the information of all agents is known

portfolio constraints and the fundamental law of active management active portfolio management is typically conducted within constraints that do not allow managers to fully exploit their ability to forecast returns constraints on short positions and turnover for example are fairly common and materially restrictive other constraints such as market capitalization and value growth neutrality with respect to the benchmark or economic sector constraints can further restrict an active portfolio s composition we derive ex ante and ex post correlation relationships that facilitate the performance analysis of constrained portfolios the ex ante relationship is a generalized version of a previously developed fundamental law of active management and provides an important strategic perspective on the potential for active management to add value the ex post correlation relationship represents a practical decomposition of performance into the success of the return prediction process and the noise associated with portfolio constraints we verify the accuracy of these relati

stability with one sided incomplete information two notions of stability ex ante stability and bayesian stability are investigated in a matching model with non transferrable utility interdependent preferences and one sided incomplete information ex ante stable matching outcomes are unblocked for every belief on the blocking partner s type while bayesian stable matching outcomes are unblocked with respect to prior beliefs ex ante stability is a minimal requirement bayesian stability is a more selective desideratum with sound efficiency properties

information aggregation in a large multi stage market game abstract a three stage market game mechanism is devised that is simple actions are quantities and outcomes are determined by arithmetic operations that do not depend on details of the economy and achieves efficiency in a two divisible good pure exchange setting with potential information aggregation after an entry stage agents make offers which are provisional for all but a small randomly selected group then those offers are announced and everyone else makes new offers with payoffs determined by a shapley shubik market game for a finite and large number of players there exists an almost ex post efficient equilibrium conditions for uniqueness are also provided

core convergence with asymmetric information we analyze the ex ante incentive compatible core for replicated private information economies we show that any allocation in the core when the economy is replicated sufficiently often is approximately walrasian for the associated arrow debreu economy

auction design and favoritism abstract the theory of auctions has ignored the fact that often auction designers not the principal design auctions in a multi attribute auction the auction designer may bias his subjective evaluation of quality or distort the relative weights of the various attributes to favor a specific bidder an ancient concern in the procurement of weapons in the auctioning of government contracts and in the purchase of electricity by regulated power companies the paper analyzes the steps to be taken to reduce the possibility of favoritism it is first shown that in the absence of favoritism quality differentials among firms are more likely to be ignored if the auction designer has imperfect information about the firm s costs second if the auction designer may collude with only one bidder the other bidders should be chosen if they are at least as efficient as the former bidder and no hard information about quality differentials is released by the auction designer that would justify fair discrimination in favor of the former bidder last if the auction designer can collude with any bidder the optimal auction tends to a symmetric auction in which quality differentials are ignored the possibility of favoritism reduces the auction designer s discretion and makes the selection process focus on non manipulable monetary dimensions of bids

decentralized trading with private information the paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values we consider an economy in which a large number of agents trade two assets in bilateral meetings a fraction of the agents has private information about the asset values we show that over time uninformed agents can elicit information from their trading partners by making small offers this form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy as a consequence the economy converges to a pareto efficient allocation

informational size and incentive compatibility we examine a general equilibrium model with asymmetrically informed agents the presence of asymmetric information generally presents a conflict between incentive com patibility and pareto efficiency we present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size the incompatibility of pareto efficiency and incentive compatibility is a central theme in economics and game theory the issues associated with this incompatibility are particularly important in the design of resource allocation mechanisms in the presence of asymmetrically informed agents where the need to acquire information from agents in order to compute efficient outcomes and the incentives agents have to misrepresent that information for personal gain come into conflict despite a large literature that focuses on these issues there has been little work aimed at understanding those situations in which informational asymmetries are quantitatively important virtually every transaction is characterized by some asymmetry of information any investor who buys or sells a share of stock generally knows something rel evant to the value of the share that is not known to the person on the other side of the transaction in order to focus on more salient aspects of the problem many models rightly ignore the incentive problems associated with informa tional asymmetries in the belief that for the problem at hand agents are infor mationally small however few researchers have investigated the circumstances under which an analysis that ignores these incentive problems will yield results similar to those obtained when these problems are fully accounted for in this paper we study a class of mechanism design problems our goal is to formalize informational size in a way that when agents are informationally small 1 early versions of this paper circulated under the titles informational smallness and pareto effi ciency and informational smallness and incentive compatibility we thank jacques cremer dean foster andreu mas colell stephen morris david schmeidler and particularly faruk gul for help ful conversations and rajiv vohra for a very careful reading we also thank the numerous partici pants in seminars at which this paper was presented for helpful comments we also thank an editor and the referees for very helpful comments and thank ichiro obara for pointing out an error in an earlier version postlewaite gratefully acknowledges support from the national science foundation

virtual utility and the core for games with incomplete information abstract the core is extended to games with incomplete information the feasible set is characterized by incentive compatible mechanisms blocking is organized at the interim stage by an incentive compatible mediation plan membership of the blocking coalition itself may be determined randomly by the blocking mediator nonemptiness of an interim fine core is proven for games with a balanced structure independent types and sidepayments an offer of severance payments may be needed to inhibit blocking core allocations are characterized in terms of virtual utility scales that generalize the weighted utility scales of the inner core mechanisms that achieve core allocations are coalitionally durable

informational robustness of competitive equilibria abstract consider an exchange economy with complete information we perturb this economy by assuming that each agent s observation about the true state of the world is noisy the paper investigates the robustness of equilibria of the complete information economy with respect to incomplete information we provide conditions under which complete information equilibria are limits of equilibria of the economies with incomplete information as the noise in the signal converges to zero journal of economic literature classification numbers d51 d82

the rate at which a simple market converges to efficiency as the number of traders increases an asymptotic result for optimal trading mechanisms private information in an independent private values market provides incentives to traders to manipulate equilibrium prices strategically this strategic behavior precludes ex post efficient market performance increasing the number of traders improves the efficiency of some trading mechanisms by enabling them to better utilize the private information traders bids and offers reveal this paper shows that the expected inefficiency of optimally designed mechanisms relative to ex post efficient allocations decreases almost quadratically as the number of traders increases

informational size incentive compatibility and the core of a game with incomplete information we study the ex ante incentive compatible core and provide conditions under which the ex ante incentive compatible core is nonempty when agents are informationally small in the sense of mclean and postlewaite 2002a econometrica 70 2421 2453