Information and Economic Efficiency

18 Pages Posted: 20 Aug 2000 Last revised: 21 Nov 2022

See all articles by Richard J. Arnott

Richard J. Arnott

Boston College; National Bureau of Economic Research (NBER)

Bruce C. N. Greenwald

National Bureau of Economic Research (NBER); Columbia University - Columbia Business School, Finance

Joseph E. Stiglitz

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Date Written: November 1993

Abstract

Is an economy with adverse selection, moral hazard, or an incomplete set of risk markets "constrained" Pareto efficient? There are two sets of papers addressing this question, one asserting that, under seemingly quite general conditions, the economy is constrained Pareto efficient, the other (to which we have contributed) that it is not. In this paper, we delineate the differences in assumptions between the two sets of papers, and under our assumptions present an intuitive proof of the Pareto inefficiency of market equilibrium with moral hazard and identify what it is that the government can do that the market cannot.

Suggested Citation

Arnott, Richard J. and Greenwald, Bruce and Stiglitz, Joseph E., Information and Economic Efficiency (November 1993). NBER Working Paper No. w4533, Available at SSRN: https://ssrn.com/abstract=227967

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Bruce Greenwald

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