Asset Market Equilibrium with Short-Selling and Differential Information

Abstract:     
We introduce differential information in the asset market model studied by Cheng (1991), Dana and Le Van and Le Van and Truong Xuan (2001). We prove an equilibrium existence result assuming that the economy's information structure satisfies the conditional independence property. If private information is not publicly verifiable, agents may not have incentives to reveal truthfully their information, and therefore contracts may not be executed. We show that conditional independence is crucial to address the issue of execution of contracts, since it ensures that, at equilibrium, contracts are incentive compatible.

Number of Pages in PDF File: 31

Keywords: Asset Market, Differential Information, Conditional Independence, Competitive Equilibrium, Incentive Compatibility

JEL Classification: C61, C62, D51

Accepted Paper Series