Reconsidering the Impossibility of Informationally Efficient Markets

Abstract:     
This paper reconsiders Grossman and Stiglitz's (1980) analysis and delivers a comparative static result which the original exhibition misses. In detail, an increase of the payoff of the risk free security is reported to affect the informativeness of the rational expectations equilibrium adversely. Furthermore, contrary to Grossman and Stiglitz (1980) both the noisy rational expectations equilibrium and the equilibrium in the market for information are characterized explicitly as functions of the underlying economy's parameters. The incompatibility of a fully revealing rational expectations equilibrium and costly acquisition of private information is obtained by means of an argument borrowed from linear regression theory.

Number of Pages in PDF File: 25

Keywords: Noisy rational expectations equilibrium, informational efficiency, market for information

JEL Classification: G14, D82, D41

working papers series