Abstract

http://ssrn.com/abstract=1573869
 
 

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Rational-Expectations Equilibrium in Intermediate Good Markets


Robert S. Gibbons


Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Richard Holden


University of Chicago

Michael L. Powell


Massachusetts Institute of Technology (MIT)

March 17, 2010

MIT Sloan Research Paper No. 4775-10

Abstract:     
We analyze a rational-expectations model of information acquisition and price formation in an intermediate-good market: prices and net supply are non-negative, there are no noise traders, and the intermediate good has multiple potential uses. Several of our results differ from the classic Grossman-Stiglitz approach. For example, the price mechanism is more informative at high and low prices and potentially uninformative at middle prices. Also, an informed trade by a producer of one final good amounts to a noise trade from the perspective of a producer of another final good, so (a) as the price mechanism becomes more informative for producers of one final good, it becomes less informative for producers of others, who therefore have a stronger incentive to acquire information, so information acquisition has the strategic-complements property between groups, and (b) having more producers (in multiple groups) become informed need not increase the informativeness of the price mechanism.

Number of Pages in PDF File: 35

Keywords: rational-expectations model, markets

JEL Classification: D80, G10

working papers series


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Date posted: March 23, 2010  

Suggested Citation

Gibbons, Robert S. and Holden, Richard and Powell, Michael L., Rational-Expectations Equilibrium in Intermediate Good Markets (March 17, 2010). MIT Sloan Research Paper No. 4775-10. Available at SSRN: http://ssrn.com/abstract=1573869 or http://dx.doi.org/10.2139/ssrn.1573869

Contact Information

Robert S. Gibbons (Contact Author)
Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )
E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Richard Holden
University of Chicago ( email )
1101 East 58th Street
Chicago, IL 60637
United States
Michael L. Powell
Massachusetts Institute of Technology (MIT) ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
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