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Informational and economic efficiency in REE with asymetric information

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

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/Inseadwp2001/2001-83.pdf

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Copyright INSEAD. All rights reserved