Information-constrained optima with retrading: An externality and its market-based solution
Name
InformationConstrained2011.pdf
Description
Final author's manuscript
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459.58 KB
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Checksum (MD5)
59491a520414acb3c18702224d074945
Author(s)
Kilenthong, Weerachart T.
Townsend, Robert
Date Issued
November 2010
Journal
Journal of Economic Theory
Publisher
Elsevier
Citation
Kilenthong, Weerachart T. and Townsend, Robert M. “Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution.” Journal of Economic Theory 146, no. 3 (May 2011): 1042–1077. © 2010 Elsevier Inc
Version
Author's final manuscript
Abstract
This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price-islands, created endogenously in equilibrium.
MIT Department
Massachusetts Institute of Technology. Department of Economics
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
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DOI of Published Version
https://doi.org/10.1016/j.jet.2010.11.001
